Today:

1
Today

• Discuss Case 1.a
• Accounting as information (and information
  system)
• Introduce Corporate Governance
• Present/ discuss D-Q 2-1

2
Case 1.a Morris the Car

• Contract form?
• Competence?
• Trustworthiness?
• Measurement criteria?
• How much would you pay for information quality
  assurance?
• Who benefits/ who pays?

3
Morris the Car what we learn

• Information Quality Assurance has value if user
  finds information valuable
• The one who hires the assurer is the one who gets
  the value
• Measurement criteria provide relevance
• Assurer reputation for competence and
  trustworthiness provide reliability

4
Essential Concepts of Lesson 2(Business
Measurement Systems Information Relevance)

• Decomposing historical accounting measurements
  and deviations from expectations for relevance
• Nature and design of accounting information
  systems as a part of business measurement
• Customizing Historical GAAP-based accounting
  information for decisions about the future

5
What do (financial) accountants do?

• Attach dollars to individual cash and accrual
  transactions and outcomes
• Allocate transaction measures to time or segments
• Estimate incomplete transaction magnitudes
• Measure (some) risks

6
Accounting as a measurement system
Cash transactions
customers
suppliers
Accrual transactions
workers
1
Periodic allocations
2
Accounting estimates
3
Threats
Risk disclosure
4
Financial statements
7
Information Assurance Demands
Employees
Customers
Suppliers
Competitors
Management
Regulators
Lenders
Analysts
Stockholders / Directors
8
ValueReporting Model

• Business model of cause and effect among key
  value drivers and measures
• Develop measurement methods for KVDs
• Validate business model (test and use)
• Compare managements view with markets view

9
Sears example VR
1 2
3
10
Georges Electronic Security
11
Definition of corporate governance (IIA, 2000)
12
Objectives - Wish List for Corporate Governance

• Disclosures that help investors predict future
  cash flow magnitude and timing
• Encourage efficient and effective operations
• Early warning of problems
• Quick corrective action when indicated
• Fairness to all parties at all times.

13
Constraints
Free markets, voluntary contracts Limited
measurement criteria Public disclosure
downside Limited statutory authority of
SEC Market alternatives (domestic and foreign)
for capital, resources, products, and regulation
14
Alternatives

• Better measurement criteria
• Better auditing
• More trustworthiness (EA, IA, AC)
• Better reporting and legal structure
• Others? --- your job!

15
Model of Corporate Governance
Competitors
General public
Corporate Governance
16
Parties in Corporate Governance

• Management
• Audit committees
• Auditors (int/ext)
• Stockholders
• Analysts/interm.
• Standard setters
• SEC regulates

• Customers
• Workers
• Suppliers
• Lenders
• Competitors
• The general public
• SEC doesnt

17
Enrons collapse illustrates

• Alleged failure of all six regulated parties (and
  their regulator), individually and in the
  aggregate --- but
• Is Enrons collapse a failure of corporate
  governance design, implementation, or oversight?
• Is the accounting community to blame?

18
Andersens fees (2000)

• Audit fee 25,000,000
• All other consulting 27,000,000
• (tax, internal audit, accounting advice, other ?)
• Which is the better business?
• Profit margin? Permanence? Competition?