Case Study Answers of The Political Cost Hypothesis- 3101AFE

Accounting Theory and Practice
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Accounting Theory and Practice
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Question 1.
Paying the manager, a fraction of the profits , it may lead to manipulate the company’s
profits. There are mechanisms developed to cater for the welfare of the owners and managers.
Such mechanisms include giving managers a bonus, which is then tied to the reported profits
(Fleischman & McLean, 2020) . Other mechanisms, such as the assumption of the self -interested
managers , lead to the reduction of c osts such as the agency costs – which encourages the
managers to work extra hard. These mechanisms can be explained from an efficiency
The PAT shows the anticipating behaviours of the company accountancy pol icy
decisions. It also shows how the businesses respond to the accounting sta ndards while also
claiming the leadership concerns about the accounting rules led by the contracts. The PAT
predicts that the procedures are established upfront and realize agents ‘ profi ts or principles.
According to PAT, princip als expect the managers to be opportunistic. Principles presume that
the managers have been opportunistic until they verify otherwise (Fleischman & McLean, 2020) .
Therefore, principles give the manager pric e protection. In addition, contractual arrangements ar e
made to limit the power of managers to manipulate future profitability. Such contractual
agreements may include a clause that restricts the choice of management in choosing between
the alternative acc ounting methodolog ies. It may also include a requirement that auditing by an
external independent party is done to all the organization’s financial statements – to attest that the
managers select all the appropriate accounting methods chosen.
Question 2
The political cost hypothesis discloses very high profits, leading to expensive political
scrutiny. Pursuant can affect the wealth redistribution through corporate taxes and subsidies,
managers of corporations can employ different ways of minimizing the re ported earnings, such
as social responsibility campaigns. This is possible rather than changing the company operations
or increasing the payments to groups . Since political procedures involve many parties, t he
possibility of individuals influencing outcome s is low. Therefore, politicians and other elected
officials use the reported profits to justify their actions and the constituents to have a small
incentive and unravel the accounting numbers used to support their arguments (Deng, 2019) .
Also, the supposi tion of the self -centeredness of elected leaders and other senates is projected ,
and voters don’t waste much time inspecting the contextual of the conclusions made regarding
the basis of reported statements and profits. Managers are assumed to be aware of this and that
the benefits accrued follow the different accounting methods.
Question 3
Agreeing to the market share require more than the other agreements , like restricting the
establishment’s total accountabilities to the other concrete assets. This is be cause, although they
face a nervous wait since the 24 banks consider either call a formal review of the ending facility,
reaching the threshold doesn’t mean that the y have breached the debt agreement previously in
place. It means that they will still updat e the banks about the company’s financial situation .
Also, suppose the banks review the financials. In that case, a four -month consultation
period takes place , after which Babcock’s market share cap remains below the $2.5 billion, and
no further arrangeme nt with the creditors on the actions to be taken.
Question 4
Suppose a n entity can make either expenditure or capitalize an ite m, the entity is subject
to a huge political analysis . In that case, the reporting entity can choose to expense the
expenditure according to the Political cost hypothesis of PAT. Generall y, the reporting entity
chooses to expense the item of expenditure to help increase the expense or decrease the
company’s t otal profit. The tota l amount of net assets may also be decreased. Consecutively, the
opposite is also found if the reporting entity decides to capitalize the item of expenditure.
Managers often have a greater enticement to select the accounting standards . Due to taxes, and
political considerations , managers select the accounting ethics that report more earnings, thus
raising the incentive reward . Large firms often face political scrutiny and a high risk of political
costs, mostly the costs that groups outside of a company may enact on the company due to
political actions Deng, L. 2019) . According to the political costs hypothesis, the political sectors
can affect the wealth transfers between different groups; therefore, voters acquire an incentive to
lobby for the regulation of an industry and even nationalization. The incentives of politicians and
elected officials that propose the actions of PAT assume that the activities are determined by
self -interest and that the demonstrative awareness groups adopt the policies and make the most
of their welfare.
Question 5
Organizations may want to overstate their assets and or understate their liabilities. This
increases the total income provided on the revenue statement. However, deceitfully rising the net
revenue can result to an impression of improved performance by both the management and the
organization. The administration overstates the expenses mainly to appease the analysts an d
investor demands and prove consistent and stable predictable earnings. It is also done because
investors don’t like to see surprises and are more content when the profits are consistent and
easily predictable (Osho & Omotayo, 2018) . In addition, an organization may want to understate
its liabilities, such as the costs of posses sions sol d, to rise the probabilities of short -term
accomplishment in the market. The Harris Scarfe executive had overstated the assets and the
liabilities understated for up to six years, which rendered it un able to pay the debts accrued.
However, investi gations had to be done to establish the company’s financial positions .
Part B
Analysis questions
BHP Group Limited (ASX: BHP)
This world -leading resources company extracts and processes oils, minerals, and gas. The
company has more than 62000 contractors and employees in Australia and America. The
company’s determination is to build a long -term shareholding value over the achievement ,
expansion , and publicizing of resources. BHP Group LTD has a share price of 47.40 and a
market cap of 241.27B. The components of financial management include the key performance
indicators . They enable the company to measure sustainable development and financial
The company uses different alternative measures to reflect the company’s underlying
performance. While these alternative performance measures are not clearly defined or specified,
they are derived from the Group’s merged economic supplies and organized acc ording to the
IFRS. The financial statements are constant with the management reviews and prepared
following the investment and board community. The key performance indicators enable the
company to measure sustainable development and financial performance (Rusdiyanto & Tjaraka,
2020) . In addition, the company can measure and manage risks, and they can protect and create
values central to achieving the purpose and strategic objectives. The risk framework has different
pillars, and the tools designed t o ident ify, analyze, and monitor the reported risk provide a
platform to understand and manage risks. The company’s code of conduct also brings the values
to life to make the right choices daily.
Deng, L. (2019). Changes and Development of Financial Accounting Theory and Practice in the
Era of Electronic Commerce.
Fleischman, R., & McLean, T. (2020). Management accounting: Theory and practice. In The
Routledge companion to accounting history (pp. 214 -251). Routledge.
Osho, A. E., & Omotayo, A. D. (2018). The Emergence of Accounting Theory from Practice
Towards General Accounting Theory in a Corporate Organizations in
Nigeria. Emergence , 9(20).
Rusdiyanto, T. S., & Tjaraka, H. (2020). Interpret The Shari’ah Accounting Practice In
Indonesian. Journal of Talent Development and Excellence , 12 (3s), 2420 -2433.

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