1 accounting: labor, capital and product markets shyam sunder yale university zhytomyr state...
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Accounting: Labor, Capital and Product Markets
Shyam Sunder
Yale University
Zhytomyr State Technological University, Zhytomyr, May 18, 2006
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Dominant Theme: Harmonization and Convergence Harmonization and convergence of
accounting practice is a dominant theme in today’s accounting
Descriptive validity: probably, with IAS Normative validity: doubtful, considering the
links between accounting and markets Build on this theme in this talk Perhaps you would not mind a discordant
note in the chorus of support for international harmonization of accounting standards
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Accounting Convergence or Differentiation by Economy and Sector Accounting practices vary in different economies Accounting practices also vary in different sectors of
the same economy (e.g., private and public sectors, and in different industries)
Convergent development of markets generates convergent pressures on accounting
Globalization is development of cross-economy markets
We examine the sources, consequences and limits of these convergent forces
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Cross-Economy Overview
Contract model of organizations and accounting
Markets shape the organization Differences in markets Differences in accounting Market development and cross-economy
convergence of accounting Limits to convergence
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Contract Theory of Organizations
Organizations can be seen as sets of contracts among people
Chester Barnard, President, Bell Telephone Company of New Jersey– Functions of the Executive 1937
Herbert A. Simon, Administrative Behavior, 1946
Terms of contract depend on the conditions prevailing in the respective markets
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Figure 1
Resource Flows in Private-Good Organization
Employees
Shareholders
Creditors
Customers
VendorsGovernment
Managers
Public
Goo
dsTax
es
Goo
ds a
nd
Serv
ices
Cas
h
Compensation
Skills
SkillsCompensation
Res
idua
lR
ight
s
Equ
ity C
apita
l
Interest
Loan
Capita
l
CashGoods and Services
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Markets Shape Organizations and Their Accounting Market for capital Market for labor Market for products Will consider two markets of special interest
to accountants today– Markets for audit services– Markets for systems of governance (Tiebout)
All these markets are not equally developed in the same or in different societies
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Functions of Accounting
Accounting to help define, implement, renegotiate and enforce contracts– Measures resource contributions– Determines inducements– Compares contributions to inducements to
determine fulfillment of contracts– Distribution of information to factor markets– Public disclosure to reduce conflict
(American Airlines)
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Markets for Labor (Managerial)
Classical double entry: – For traders, – Causal links in transactions (ijiri)– Aid to memory, no hired managers
Managerial Accounting– For hired managers– Hierarchy or organization– Stewardship or agency problem– Rise of business schools to supply this market
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Contracting Problems in Markets for Labor Problem of differential expectations of various
parties– Importance of public disclosure to reduce conflict
Recent problems in US Corp. governance: asymmetric information– Managers defining their own contracts– Stealing from the firm
Very old issues (East India Company) As labor markets developed in societies, so
did organizations and their control systems
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Informal Evidence: U.S. and Japan Differ in their industrial organization => definition of
entity and consolidation Importance of debt markets and control Managerial and labor markets=> differences in
employment contracts Weak equity markets and financial reports Non-existent market for corporate control Changes in markets=>changes in accounting With time, we could develop better field evidence on
this correspondence
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Markets for Capital
Closely-held firms: equity supplied by one person or tight group who can control management
Publicly-held firms: equity supplied by a large, diverse group of investors who cannot directly control the managers
Gave rise to financial reporting form of accounting
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Consequences of Capital Markets
Robust accounting (less judgment) Introduction of rules and auditors Management of income less acceptable Competition among source of information Shift from stock to flow variables Most firms’ shares not traded Firms choose their organizational forms and their
accounting regimes US-Japan comparison of equity-bond markets
and their financial reporting systems
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Markets for Products
Private good organizations produce and sell goods for a price to customers
Customers can impose discipline on them
Shareholders control managers by offering them net income based compensation
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Public Good Organizations
Public good organizations have beneficiaries, not customers
Weaker or no customer discipline Efficient production of public goods is
very difficult Solution to the control problem is
bureaucracy and a different accounting system
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Comparing Private and Public Good Organizations Resource flows Residual Claims Product Market Discipline Decision Making
– Product
– Investment Accounting and Control
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Accounting and Controls
Differences between internal control and financial reporting
Differences often misinterpreted as prima facie evidence of poorly designed or poorly run public good organizations
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Accounting and Control Differences Entities Funds Consolidation Assets/Depreciation Revenue (cash versus accrual) Budgets
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Bureaucracy
Bureaucracy is the oldest form of management
Does not receive a fair shake in press Perhaps overused in welfare state But it is necessary for many functions Lack of understanding leads to
misguided attempts at reform that can backfire
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Unequal Race
Efficient production of public goods is more difficult than private goods (lack of customer discipline on managers)
Always room for improvement in current practices
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Market for Audit Services
Recent collapse of auditing in US Blamed on “bad” people But there is a larger story of “bad” policy We need to trace what happened over
the preceding quarter century in the audit market in US
The we can better able to understand both the causes as well as the cures
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Market for Accounting Governance Desirability of a single set of rules has
become a consensus There are good reasons to question this
consensus Does there exist a right set of standards that
will fix our accounting troubles: wrong search Even if the answer is yes, what is the major
hurdle that standard setters face in their search– They can’t tell which rules are better
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What can we do to help them find better rules? Better information about the consequences of
their prescriptions This can’t happen with an accounting
monopoly of FASB in US or IASB in the world Likely to get stuck in a corner solution, with
no possibility of getting evidence on what can be better
Consider regulatory competition– Unfortunately, the accounting world is headed in
the other direction
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Summary
Sectoral differences in accounting arise from market differences
Market developments will not necessarily eliminate them
We should expect sectoral differences in accounting to persist globally, even as economy-wise differences diminish over time
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Thank You
The paper and slides will be available at http://www.som.yale.edu/faculty/
sunder/research.html or email to shyam.sunder@yale.edu
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