Theory of Accounting and Control

1
Theory of Accounting and Control

• Shyam Sunder, Yale University
• Kozminski University, Warsaw, Poland
• May 16, 2009

2
ACCOUNTING AND CONTROL IN ORGANIZATIONS A
CONTRACT THEORY

• PART I
• CONTRACT THEORY OF THE FIRM
• CHAPTER 1 INTRODUCTION
• CHAPTER 2 ACCOUNTING AND CONTRACT MODEL OF THE
  FIRM
• PART II
• MICROTHEORY OF ACCOUNTING AND CONTROL
• CHAPTER 3 CONTRACTING FOR MANAGERIAL SKILLS
• CHAPTER 4 MANAGERS AND ACCOUNTING DECISIONS
• CHAPTER 5 INCOME AND ITS MANAGEMENT
• CHAPTER 6 INVESTORS AND ACCOUNTING
• CHAPTER 7 ACCOUNTING AND THE STOCK MARKET
• CHAPTER 8 AUDITORS AND THE FIRM
• PART III
• MACROTHEORY OF ACCOUNTING AND CONTROL
• CHAPTER 9 CONVENTIONS AND CLASSIFICATION
• CHAPTER 10 DECISION CRITERIA AND MECHANISMS
• CHAPTER 11 STANDARDIZATION OF ACCOUNTING

3
ACCOUNTING AND CONTROL IN ORGANIZATIONS A
CONTRACT THEORY

• Part I CONTRACT THEORY OF THE FIRM
• Chapter 1 Introduction
• THREE BASIC IDEAS
• Organizations as a Set of Contracts
• Shared Facts for Conflict Resolution g
• Control in Organizations as Balance and
  Equilibrium
• MICROTHEORY OF ACCOUNTING AND CONTROL
• Functions of Accounting and Control
• Managers and Income
• Shareholders, Stock Markets, and Auditors
• MACROTHEORY OF ACCOUNTING AND CONTROL
• Basic Features of Accounting
• Social Choice Criteria, Mechanisms, and
  Standardization
• Government and Public-Good Organizations

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• Chapter 2 Accounting and the Contract Model of
  the Firm
• THE FIRM AS A SET OF CONTRACTS
• ACCOUNTING AND THE FIRM
• Measuring Contributions
• Measuring Entitlements
• Distribution of Information about Contract
  Fulfillment
• Liquidity of Markets for Contractual Slots
• Common Knowledge for Renegotiation of Contracts
• CORRESPONDENCE BETWEEN ORGANIZATIONAL AND
  ACCOUNTING FORMS
• Bookkeeping
• Managerial Accounting
• Financial Reporting
• Chapter 2 References

5

• Part II MICROTHEORY OF ACCOUNTING AND CONTROL
• Chapter 3 Contracting for Managerial Skills
• CHARACTERISTICS OF MANAGERS
• Human Capital
• Measuring Managerial Contribution
• Contact with Other Agents
• FORMS OF CONTRACTS FOR MANAGERS
• Managers Preferences
• Contracts of Top, Middle, and Lower Level
  Managers
• Chapter 3 References

6

• Chapter 4 Managers and Accounting Decisions
• HIERARCHY OF ACCOUNTING DECISIONS
• Discretionary Decisions on Expensing-Capitalizatio
  n of Costs
• Accounting Estimates
• Accounting Principles
• Disclosure Policy
• Internal Controls
• Accounting Standards
• CERTAIN FEATURES OF CONTROL SYSTEMS
• Cost of Accounting
• Transfer Pricing
• Cost Allocations
• Participative Budgeting
• Standards and Variance Analysis
• MANAGERIAL CONSEQUENCES OF ACCOUNTING DECISIONS
• The LIFO Puzzle

7

• Chapter 5 Income and its Management
• INTRODUCTION TO INCOME
• FUNCTIONS OF INCOME IN A FIRM
• Assessing Viability of the Firm
• Managerial Evaluation and Contract Renegotiation
• ATTITUDES OF AGENTS TOWARD INCOME
• Shareholders
• Managers
• Determination of Entitlements
• MANAGEMENT OF INCOME
• Statistical Measures of Smoothness
• Income Processes Smoothness vs. Smoothing
• Income-Smoothing vs. the Big Bath Hypotheses
• Instruments of Income Management
• Summary of Empirical Findings

8

• Chapter 6 Investors and Accounting
• DESCRIPTION OF THE INVESTOR CLASS
• The Lack of Active Participation
• Transferability of Contract
• Heterogeneity of Preferences
• Information and Speed of Price Adjustments
• Information Intermediaries
• Creditors
• INVESTOR ATTITUDES AND PREFERENCES
• Reporting on Contract Performance
• Incentives to Managers
• Aggregation Adds Information
• ACCOUNTING CHOICE MECHANISMS FOR
• INVESTORS
• Organization of the Firm
• Trading in Capital Markets

9

• Chapter 7 Accounting and the Stock Market
• INTRODUCTION
• Limited Role for Valuation Rules
• Role of Information Intermediaries
• QUESTIONS ABOUT ACCOUNTING AND THE STOCK MARKET
• Money from Accounting Numbers
• Money from Advance Access to Accounting Numbers
• Effect of Accounting Methods on the Stock Market
• Effect of the Stock Market on Accounting
• Accounting Without the Stock Market
• The Stock Market Without Accounting
• PROBLEMS OF INFERENCE
• The Needle in a Haystack Problem
• The Expectations Problem
• The Self-Selection Problem

10

• Chapter 8 Auditors and the Firm
• INTRODUCTION
• THE FUNCTION OF AUDIT IN THE FIRM
• AUDITOR DECISIONS
• Allocation of Resources in an Audit Assignment
• Audit Opinion
• Pricing of Services and Bidding for Clients
• Audit Policies, Training, Quality Control, and
  Self Regulation
• Technology of Audit
• Institutional Structure of the Audit Profession
• Development of Audit Standards
• Development of Accounting Standards
• Who Sets the Standards?
• Auditors Responsibility for Detection of Fraud
• Competition, Entry, Discipline

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Part III MACROTHEORY OF ACCOUNTING AND CONTROL

• Chapter 9 Conventions and Classification
• CONVENTIONS
• ACCOUNTING CONVENTIONS
• ECONOMIC FEATURES OF ACCOUNTING
• Entity
• Going Concern or Continuity
• Period
• Valuation
• Accrual
• TEMPORAL STABILITY OF ECONOMIC FEATURES
• Double Entry
• Economic Resources
• UNIFORMITY AND CLASSIFICATION
• Chapter 9 References

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Chapter 10 Decision Criteria and Mechanisms

• CRITERIA FOR SOCIAL CHOICE
• Technological Efficiency
• Simple Economic Efficiency
• Multi-Person Economic Efficiency
• Multi-period Problem
• Uncertainty Problem
• SOCIAL COST-BENEFIT ANALYSIS
• Which costs and which benefits?
• Problems of partial analysis
• Nonlinear utilities
• Measures of Efficiency
• MECHANISMS FOR SOCIAL CHOICE
• Limitations of Voting Mechanisms
• Market Mechanisms in Accounting Standards
• Legal Rights and Markets
• Chapter 10 References

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Chapter 11 Standardization of Accounting

• RULES AND ECONOMIC DECISIONS
• Rules as Constraints
• Rules as Payoff Functions
• Voluntary and Mandatory Behavior
• ECONOMICS OF RULES AND STANDARDS
• Benefits
• Costs
• Distribution and Equity
• Adjustment to New Standards
• ECONOMIC THEORIES OF STANDARDS
• Monopoly and Limiting Competition
• Provision of Public Good

• ACCOUNTING STANDARDS
• Types of Standards
• Enforceability of Standards
• Market Argument
• Argument for Market Failure
• A Synthesis
• INSTITUTIONS FOR SETTING ACCOUNTING STANDARDS
• Models of Social Institutions
• Force of Standards
• Capture of Institutions
• EFFECTS OF STANDARDS
• On Accounting Systems
• On Accounting Education
• On the Auditing Profession
• Chapter 11 References

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Chapter 12 Government, Law, and Accounting

• GOVERNMENT AS A CONTRACTING AGENT
• Government as Tax Collector
• Government as Customer
• GOVERNMENT AS A SUPER-FIRM
• Charter of Firms
• Sale of Securities
• Certification, Licensing, and Discipline of
  Auditors
• Chapter 12 References

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Chapter 13 Accounting for Public Good
Organizations

• NOMENCLATURE AND CLASSIFICATION
• ECONOMIC CHARACTERISTICS OF NRIOs
• Markets for Resources
• Agents
• CHARACTERISTICS OF ACCOUNTING IN PUBLIC GOOD
  ORGANIZATIONS
• Entities and Funds
• Government Funds
• Proprietary Funds
• Fiduciary Funds
• Consolidation and Detail
• Recognition and Accrual
• Fixed Assets, Depreciation and Long Term
  Liabilities
• Budgets, Appropriations, and Encumbrances
• INTERACTION BETWEEN ACCOUNTING FOR NRIOs AND
  ARIOs
• Chapter 13 References

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CHAPTER 1

• SHARED FACTS FOR CONFLICT RESOLUTION
• Disputes, waste of resources
• Role of evidence (shared info)
• Common knowledge
• Theoretical abstraction
• Practical Approximation
• Games of imperfect, incomplete information
• Firm as a game of incomplete information
• Role of public disclosure
• CONTROL IN ORGANIZATION
• Conflict and cooperation
• Bargaining example
• Balance Equilibrium
• Contrast from control OF organizations

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CHAPTER 3

• CHARACTERISTIC OF MANAGERS
• Wealth as human capital
• Contribution hard to measure
• Procedural centrality
• HUMAN CAPITAL
• Stock of human capital is inalienable
• Long term contracts are on flow, which are not
  enforceable
• Contracts must be self-enforcing
• Human capital used at work but not used up
  (actually it is accumulated at work)
• Compensation current accretion of human
  capital(Accounting is important for both)
• Short run supply of managerial human capital is
  inelastic
• Opportunity to extract rents
• Vulnerable to expropriation
• Managers cannot sell their job slots
• Managerial market transactions rely on reputation
• accounting permanence data
• Managers have an un-diversified portfolio of
  personal wealth which is sensitive to small
  changes in current performance
• Performance data extrapolated by
  investors/superiors

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• MEASURING MANAGERIAL CONTRIBUTIONS
• Not directly measurable
• More difficult at higher levels
• Difficulty in designing their contacts
• PROCEDURAL CENTRALITY
• CONTACT WITH OTHER AGENTS
• Procedural centrality of managers
• Managing contracts
• Surprises nature, unanticipated behavior of
  others
• Privileged access to info about other contracts
• Info asymmetry in favor of managers
• Problems of adverse selection
• they know what others dont
• Moral hazard
• others do not know what they did
• Could sell info to competitors for personal gain
• Prohibition on sharing services of managers
  across competitors

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FORMS OF CONTRACTS FOR MANAGERS

• Enforcement difficult because of
• Nature of work
• human capital
• involvement in contracts of others
• Legal system could help if shared information is
  available
• HOW DO WE MAKE IT SELF-ENFORCING?
• FLAT SALARY IN PUBLIC GOOD ORGANIZATIONS
• EVEN OUTPUT IS DIFFICULT TO MEASURE
• POOR MOTIVATIONAL TOOL
• PERFORMANCE CONTINGENT CONTRACTS
• NO SINGLE MEASURE IS PERFECT
• FACTORS OUTSIDE MAN. CONTROL
• SUBJECT TO MAN. MANIPULATION

• CONDITIONS FOR JOB LOSS LEFT
• UNSPECIFIED
• RIGHT TO UNILATERAL TERMINATION
• WITHOUT CAUSE
• ROLE OF ACCOUNTING IN
• MANAGERIAL CONTRACTS
• MANAGERS PREFERENCES
• PECUNIARY VARIABLES
• NONPECUNIARY VARIABLES (FUTURE COMP.)
• SALARY IS ABOUT HALF OF TOTAL FOR CEOS
• BENEFITS DRIVEN BY TAX LAW, TRANS.
• COSTS, SIGNALING
• INTERACTION BETWEEN
• PECUNIARY AND OTHERS

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Chapter 4Managers and Accounting Decisions

• Hierarchy of Accounting Decisions
• By frequency of decisions
• Expensing-Capitalization decisions
• Managerial unique access to causes and
  consequences
• Create facts by classification
• Discretion unavoidable, no perfectly mechanical
  solution for classification is possible
• Demarcation of capital improvements, repairs,
  overhauls, rebuilding, salvaging and maintenance
• Managers can choose timing of transactions
• Law of conservation of income
• Performance measures and contractual consequences
• Short-term contracts induce capitalization
• Countervailing factors smoothing, longer term
  compensation plans, and auditing
• Accounting estimates
• Bad debt allowance, warranty costs, NRV of
  byproducts, salvage values and economic life
• Varying degrees of flexibility
• Same motivations as the expensing decisions

• Accounting and control includes
• Basic data collection
• Performance reports
• Financial reports
• Choice of organizational form includes the choice
  of accounting and control
• Managers directly in charge of accounting and
  control
• Other agents participate less directly
• Reacting and voting with their feet
• Managers must anticipate and consider such
  reactions
• Managers also participate in shaping accounting
  regimes
• Consider the range of managerial accounting
  decisions
• Review some features of accounting from contract
  perspective
• Consequences of accounting decisions for managers
• Consequences for observable managerial behavior

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• Accounting Principles
• Short term consequences for compensation
• Longer term consequences and constraints
• Image and signal
• Auditing
• Disclosure Policy
• Compliance with the law and disclosure beyond the
  required level
• Better information for participating/other agents
• Temptation to disclose selectively
• Trade off between credibility and cost of
  verification
• Effect on liquidity of factor markets
• Consequences of performance forecasts by managers
• Competitors and investor diversification
• (Competing against privately held firms)
• Disclosure to limit opportunism of managers
• Is less disclosure necessarily good for managers?
• Is more disclosure necessarily good for
  shareholders?

• Internal Controls
• Broad managerial discretion
• Foreign Corrupt Practices Act 1977 requirements
• Sarbanes-Oxley 2002 requirements
• Cost Accounting Standards Board for government
  vendors
• Manager is a principal as well as an agent in
  different contractual relationships within the
  firm
• Consistency of internal controls helps balance
  motives
• Ideal self-enforcing contract for control
• Accounting Standards
• SEC, FASB, IASB make rules
• Managers often participate on behalf of the firm
• Can we distinguish managerial and firm interests?
• Bank loan restructuring example
• Reflexivity of accounting does it only represent
  reality or does it also create reality?
• What should be role of firms/managers in setting
  standards?

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Certain Features of Control Systems Cost-benefit
analysis of accounting and control systems

• Transfer Pricing
• Standard textbook solution discards the
  problem
• Essence of decentralization trade-off
  between benefits and costs
• Benefits of central coordination
• Informational disadvantage of the center
• Heart of organizational design problem
• Cost Allocation
• Declared a dead issue many times, but not dead
  yet
• Does allocation of sunk costs to divisions make
  sense
• Ex post efficiency of resource utilization versus
  ex ante efficiency of resource acquisition
  decisions
• Participating Budgeting
• Empowerment vs. dispersed information argument
• Hayek Information is dispersed in the economy
• Trade-off better decisions based on more
  information
• Worse decisions shaded by information agents
  choose to share
• Management consulting fads wax and wane
• People bring their own expectations, no blank
  slate

• Standards and Variance Analysis
• Budgets and standards imply a discontinuity in
  managerial reward functions
• Anticipation by agents
• Complex non-linear dynamics
• Managerial Consequences of Accounting Decisions
• The LIFO Puzzle
• Accounting for Leases
• Restructuring of Troubled Loans
• Cost of Exploration, Research and Development
• Recognizing Option Value as a Compensation
  Expense
• Rationality of apparently irrational decisions?
• Observable Behavior of Managers
• Preference for status quo
• Income management
• Prediction of accounting methods by firm
  characteristics

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Chapter 5Income and Its Management

• Firm as a source of income for all participants
• Wage income
• Personal service income
• Interest income
• Land rent
• Sales income, etc.
• Each agent looks at own return from the
  contributions
• Shareholder incomea narrower perspective
• What is special about shareholder income
• Residual nature
• Defined independently of others income
• The Degree of freedom problemn pieces of a pie
• Timing of transfer of income to claimants delay
  for shareholders
• Other agents get their share on predefined
  schedule
• Dividend is discretionary
• Diffuse of body of shareholders cannot enforce
  contracts on timing of transfer of income
• Taxation makes it difficult to automatically
  transfer income

• Income to equity cannot be measured precisely and
  in a timely manner
• No ship accounting, no periodic liquidation of
  assets, continued long term asset investments
  with imperfect and incomplete markets
• Indeterminacy of valuation, combined with the
  control of management over valuation?opportunity
  for income management
• Difficulty of measuring managerial input?linking
  compensation to output/income ? use of managerial
  discretion for self-serving purposes
• Shareholders rely on information in possession of
  the mangers but cannot be sure that management
  will use this information only for shareholders
  benefit
• Independent audits to put constraints
• Imperfections of monetary representation of
  income vs. real income

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Law of Conservation of IncomeLaw of Conservation
of Discounted Residual Income

• Functions of Income in the Firm
• Assessing viability
• Everybody makes projections to the future
• Managerial evaluation and contract renegotiation

• Determination of Entitlements
• Management of Income
• Statistical measures of smoothness
• Smoothing smoothness?
• Income smoothing and big baths
• Instruments of income smoothing
• Incentives for covering the tracks

• Attitudes of Agents towards Income
• Shareholders money income as an estimate of real
  income
• Would like to get the first best estimate
• Fundamental model of valuationrelevance?
• Managers Use of accounting to advance their own
  welfare (job security, level, compensation, firm
  size all linked to corporate income), risk
  dislike abrupt changes in income
• Employment horizons shorter than firm horizon
• Look at income management from the point of view
  of managers (bonus, options, could be terminated
  before the fruits of labor appear in the
  financial statements)
• Managers expectations of what the shareholders
  would do
• Manager cannot iron out the kinks in the income
  streams (no retrospective adjustments)
• Limits on choice of accounting methods
• Not certain about the consequences of choices
  they make
• How do you smooth a random walk series?

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CHAPTER 6INVESTORS AND ACCOUNTING

• WHAT IS SPECIAL
• PRECOMMITMENT
• TIME DELAY
• RESIDUAL CLAIM ONLY
• MEASUREMENT AND CONT. FULFILLMENT CRUCIAL
• DESCRIPTION
• LITTLE PARTICIPATION
• ON PURPOSE, DESIRABLE, DIVERSIFICATION
• ROE ON OWNER MANAGED FIRMS SAME
• TRANSFERABILITY
• MINIMAL COST, RAPID PRICE ADJUSTMENT
• SYMMETRY OF INFO (PUBLIC DISCL.)
• CONTRAST PRIVATELY HELD FIRMS
• COST OF TAKING THEM PRIVATE
• PREFERENCE HETEROGENEITY
• LIQUID MARKET GIVES A UNIQUE MEASURE
• PRICE ADJUSTMENTS TO INFORMATION
• DETERMINE DISTRIBUTION OF WEALTH
• EQUITABLE RELEASE OF INFORMATION

• INFORMATION INTERMEDIARIES
• DEMAND FOR INFORMATION
• COST OF INFORMATION
• DIVERSIFICATION BY INDIVIDUAL
• INFORMATION INTERMEDIARIES
• PROBLEM OF EVAL. PORTFOLIO MAN.
• DO NOT ASK FOR DISCL.
• ANALYSTS DEMAND DISCLOSURE,
• DETAIL
• CREDITORS
• NONPERMANENT COMMITMENT
• SHORT TERM CREDITORS
• SECURED CREDITORS
• UNSECURED LONG TERM CREDITORS
• LARGE CREDITORS-LITTLE INTEREST
• DESIGN OF DEBT COVENANTS--GAAP
• WHY RELIANCE ON GAAP
• AUDIT COST
• INTERDEPENDENCE OF FIRM CONTRACTS

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• INVESTOR ATTITUDES AND PREFERENCES
• REPORTING ON CONTRACT PERFORMANCE
• IMPORTANCE OF CONTRACT FULFILLMENT
• CONTROLS AND REDUNDANCY
• SYMMETRY OF INFO DISTRIBUTION
• INCENTIVES TO MANAGERS
• TOP MANAGER CONTRACTS
• LIMITS ON RELEVANCE AND RELIABILITY
• RRA IN OIL INDUSTRY
• AGGREGATION ADDS INFO
• INFORMATION IN AGGR. FUNCTION
• ACCOUNTING CHOICE MECHANISM
• ORGANIZATION OF THE FIRM
• NATURE OF CHARTER
• GOING PUBLIC
• TRADING IN CAPITAL MARKETS
• DIVIDENDS AND VALUATION
• ANALOGY OF BUYERS AND CARS

• CONSEQUENCES OF ACCOUNTING POLICY FOR INV.
• ACCG. INFORMATION AS PUBLIC GOOD
• UNDER PRODUCTION?
• COMMON COST OF CONTRACTS
• SPECIAL VULNERABILITY OF INVESTORS
• NOT IN DIRECT TOUCH WITH OPERATIONS
• FREE DIST. OF INFO--DYNAMIC STABILITY
• ADVERTISING ANALOGY
• PRODUCTION BY INTERMEDIARIES
• WHO PAYS, WHO BENEFITS
• EARLY EFFICIENT MARKET EUPHORIA
• ECONOMICS OF INFORMATION MARKET
• CRITICISM OF DETAILS FOR ANALYSTS
• OPEN ENTRY TO ANALYST MARKET

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Chapter 7 Accounting and the Stock Market

• Accounting interface with shareholders
• Contributions cash or real, made in advance
• Entitlements real capital on basis of accounting
  records, converted to money in financial reports
  through valuation rules
• Reports of contract fulfillment unnecessary
• Liquidity verified reports to potential
  investors
• Public disclosure to reduce information
  asymmetry
• Limited role for valuation rules
• Entitles to real capital, not money
• Imperfection of valuation rules, vulnerability
  to manipulation
• Only function (4) affected by valuation rules

• Role of information intermediaries
• Primary, secondary and tertiary markets firm
  involved in P
• Derived demand in P market, bankers
  compensation
• Reputation of banker as protection against
  collusion (effectiveness??)
• Change of auditors, insurance
• Money from Public Accounting Numbers
• Discovery and use of information
• Competition in the market for information
• Trade off between the speed of dissemination and
  depth of markets
• Prospecting for gold
• Academic studies vs. practical implementation of
  money making
• Impossibility of informationally efficient
  markets

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• Money from Advance Access to Accounting Numbers
• We would like to have direct evidence about the
  money that can be made from advance access
• Insider trading studies
• Ball Brown (event studies) dont quite do it
• Effect of Accounting Numbers on Stock Market
• Investor expectations ? stock prices
• Accounting data ? investor expectations
• Difficulty of doing studies on formation of
  investor expectations (not from field data)
• Role of accounting in preserving the resources of
  the firm (control)
• Role of accounting in managerial/employee
  motivation
• Linking investor and employee behavior into an
  equilibrium
• Managerial selection

• Effect of the Stock Market on Accounting
• Not much research on the topic
• Beginning of efforts to standardize accounting
  after creation of the SEC
• Reynolds example
• Managerial concerns about stock market reaction
  (LIFO)
• Accounting without Stock Market
• Choice of going public
• Stock Market without Accounting
• Think about the question before the next value
  relevance study
• Accounting a must for mutual observables to
  contract on
• Stock market would be impossible without
  accounting
• Problems of Inference
• Needle in the Haystack Problem
• The Expectations Problem
• The Self-selection Problem

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Chapter 8 Auditors and the Firm

• Functions of the Audit in the Firm
• Auditor Decisions
• Allocation of resources in an audit assignment
• Audit Opinions
• Pricing audit services and bidding for clients
• Audit policies, training, quality control, and
  self-regulation
• Institutional Structure of the Audit Profession
• Development of Audit Standards
• Development of Accounting Standards
• Who Sets the Standards?
• Auditors Responsibility for Detection of Fraud
• Competition, Entry and Discipline

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Chapter 9 Conventions and Classification

• Examination of the traditional terms of
  accounting in terms of contract theory of the
  firm
• Link them to familiar social science concepts
• Features of accounting as economic choice of
  convention
• Temporal stability does not mean convention
• Distinction is important for setting accounting
  standards
• Rules as systems of classification
• Importance of the nature of classification for
  standard setting
• Conventions
• A coordinating device in a game
• Games in which coordination can yield Pareto
  superior outcomes but communication is difficult
  or impossible
• Applied to recurrent situations
• Must be common knowledge
• It is in the interest of everyone that one more
  person will conform to the convention

• Existence of an alternative which is just as good
• Driving on the right or left
• Debits on the right or left
• Balance sheet in order of decreasing or
  increasing liquidity
• In accounting literature a lot of confusion and
  confusing definitions of conventions (Gilman,
  Kohlers Dictionary)
• Stake in maintaining the status quo
• Differentiated from economic choices
• Economic Features of Accounting
• Features which are not conventions
• Will changing the feature affect any agent?
• Conservatism
• Entity
• Going concern use and disposal values
• Period
• Valuation
• Accrual
• Accrual
• Temporal Stability
• Double Entry

31
Chapter 10. Decision Criteria and Mechanisms

• Criteria for social choice
• Technical efficiency
• Simple economic efficiency
• Multiperson economic efficiency
• Multiperiod problem
• Uncertainty problem
• Social cost benefit analysis
• Which costs, which benefits?
• Problem of partial analysis
• Nonlinear utilities
• Measures of efficiency
• Mechanisms for Social Choice
• Market or Political/Administrative
• Limitations of voting mechanisms
• Market mechanisms for accounting standards
• Legal rights and markets

32
Outline of Current Research In Accounting

• Contract Model of the Firm
• A Useful Framework for Organizing Accounting
  Research
• Micro-Level Research
• Research on Decisions of Various Participants
• Research on Effects on Various Participants
• Macro-Level Research
• Research on characteristics of the system
• Research on alternative designs of the system
• Survey the research work being carried out in
  each category
• What are interesting questions in each category?
• What have we learned so far?
• What questions remain open?
• (Use of Table of Contents of the Sunder book
  manuscript)

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• Functions of accounting and control
• Chapter 5
• Managers and income
• Difficulty of measurement
• Link compensation to output
• Choice of accounting methods
• Income role in organization multiple management
• Share holders, stock market auditors
• Basic features conventions, economic features
• Social choice mechanism criteria
• Standards
• Government law
• Accounting for public good organization