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Accounting Theory - Essay Example

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has asked me to prepare a report that draws upon my knowledge of positive and normative accounting theories to examine the factors that lead to the collapse of the Enron Corporation. My employer, the Australian Accounting Standards Board (AASB) will draw upon my findings when…
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Accounting Theory
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Download file to see previous pages There were implications of the non working of the capital market to reflect the different factors that could have brought the prices of Enron’s stock price. This could be dramatized in the loss to trust of the investors in the reliability of the financial statement of all other companies which are listed in the stock exchanges. This fact was confirmed by surveys.
It was found also that there are kinds of asymmetry of information which may prevent the efficient operation of capital markets. It could be the "moral hazard" type and the adverse selection type, which were both analyzed to have caused the demise of Enron. It was also further found that there could be perspectives in the choice of accounting policy that could affect the very life or the probability of success of a corporation. One is under the efficient perspective of positive accounting theory; where management would be encouraged to works first for the firm and the stockholders before their own. Such perspective has also its grounding in cost effective accounting system that would promote accountability with the company’s assets. On the other hand there is the other perspective, which is called opportunistic perspective positive accounting theory. It was found theoretically that the efficiency perspective was the very opposite of the opportunistic perspective and therefore its adoption could actually prevent the operation of the latter. What happened then in the Enron was that there was the adoption of the opportunistic perspective. Such adoption was evidenced in the design of the compensation system of the company executives as well as in the retirement system of the employees. Enron was virtually under a situation where the executives will have to choose committing fraud or taking risk because of their (executives) tendency to rather make themselves rich before the company under the opportunistic perspective of accounting theory.
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