Question 1

Which of the following statements shows that Adam Smith advocated a regulatory approach?

Accepted Answer

A)   Without regulatory involvement, productive resources will find their way to the most productive uses.
B)   Leaving activities to the control of market mechanisms will protect market participants.
C)   The government needs to be involved in the 'public interest' to protect the more vulnerable.
D)   None of the given options are correct. C

Question 2

According to some free-market theorists,there are private economics-based incentives for the organisation that will ensure that credible information will be provided.Which of the following assumptions is not consistent with this?

Accepted Answer

A)   Managers will provide true and correct information for fear of not being rewarded, or fired for not doing so.
B)   Shareholders will assume managers will act opportunistically and so, in the absence of safeguards, will pay less for shares.
C)   Lenders will price protect, in that the higher the preserved risk, the higher will be the cost of loan funds demanded.
D)   All of the given options are correct. A

Question 3

Which of the following propositions is not true if we accept the notion that accounting regulation is considered to be the output of a political process?

Accepted Answer

A)   Financial accounting is objective, neutral and apolitical.
B)   Standard-setting bodies encourage affected parties to make submissions on draft versions of the proposed accounting standards.
C)   Many decisions that are made are the outcome of compromise.
D)   If the social welfare impact of accounting policies were ignored, the basis for the existence of a regulatory body would disappear. A

Question 4

The rationale that 'Regulators will only propose and support regulation which leads to favourable outcomes for themselves,perhaps in terms of their re-election' is true for:

Accepted Answer

A)   Public Interest theory of regulation
B)   Capture theory of regulation
C)   Economic interest theories of regulation
D)   None of the given options are correct.

Question 5

Which of the following is not an example of a qualitative characteristic guiding the production of financial accounting information?

Accepted Answer

A)   Neutrality
B)   Representational faithfulness
C)   Consideration of economic and social consequences
D)   Consistency and comparability

Question 6

Which of the following statements is not true about the economics-based perspective of 'rationality' or 'self-interest' in explaining the behaviour of managers?

Accepted Answer

A)   Managers will work in their own self-interest unless constrained to do otherwise.
B)   Managers are opportunistic and in the absence of safeguards will reduce the amount they will pay for shares.
C)   Managers work towards maximising the benefits of all stakeholders.
D)   None of the given options are correct.

Question 7

Which of the following is not a cause or result of 'information overload' or standards overload?

Accepted Answer

A)   Increased compliance costs
B)   Attempts to create a level playing field by requiring disclosures that provide equal access to information to everyone
C)   Concerted lobbying by different interest groups that are economically or socially affected
D)   Increased understanding of accounting information because of the increased quantity of standards and disclosures provided

Question 8

Proponents of the free market approaches to accounting regulation use Adam Smith (1937)as a basis for support.Which of the following is not associated with Adam Smith's writings on the workings of the free market?

Accepted Answer

A)   The concept of the 'invisible hand' to guide allocation of resources for individuals and, as a result, does so for the market as a whole.
B)   No government intervention is necessary, as the free market can optimally allocate and distribute resources.
C)   Individuals pursuing their own self-interest results in resources finding their way to their most productive use for the economy as a whole.
D)   All of the given options are correct.

Question 9

Which of the following assumptions of the market for corporate takeovers can be criticised for being unrealistic in practice?

Accepted Answer

A)   An under-performing firm will be taken over by another firm, which will then subsequently replace the current management team.
B)   Managers will be motivated to maximise the firm's value to minimise the likelihood that outsiders could seize control.
C)   Management will know the marginal cost and benefit involved in producing the optimum amount of information required to minimise the firm's cost of capital.
D)   All of the given options are correct.

Question 10

Which of the following is a valid criticism of the economics-based rationality argument that asserts that credible information will be supplied in the absence of regulation,by aligning management's self-interest with that of the owners and lenders,thereby reducing the cost of capital?

Accepted Answer

A)   The arguments do not follow logically.
B)   The arguments do not have historical support.
C)   The assumptions of management self-interest is too pessimistic.
D)   The argument has no empirical support.

Question 11

Which of the following was not one of the pieces of evidence put forward by Walker (1987)to argue that the ASRB had been captured by the accounting profession?

Accepted Answer

A)   The accounting profession's AARF proposals for standards were fast-tracked, but more stringent requirements were in place for others.
B)   The profession influenced new appointments to the AASB so that, after just 2 years, virtually all members had some community of interest with the professional accounting bodies.
C)   The whole of AARF was merged with the AADB in 1987.
D)   By the beginning of 1986, the accounting profession indirectly managed to influence the procedures, priorities and output of the AASB.

Question 12

Which of the following arguments is used in support of reducing accounting regulation?

Accepted Answer

A)   Accounting information is like any other good, and the forces of supply and demand should be allowed to operate so that the optimal amount of accounting information is produced.
B)   The capital market operates quite efficiently, and will impose penalties on managers who elect to provide biased information about an organisation's financial performance and position.
C)   Individuals act in their own self-interest and will use the given regulation to maximise their own wealth.
D)   All of the given options are correct.

Question 13

Which of the following is not a valid criticism that management will enter performance-based contracts that will reward or constrain their behaviour,to maximise the value of the firm?

Accepted Answer

A)   It assumes management can gain more by entering a performance-based contract than by continuing to act opportunistically.
B)   It relies on credible accounting numbers to monitor performance, but there is no incentive to provide credible unbiased information.
C)   It assumes that managers always act from self-interest and do not attempt to maximise the value of the firm, which may not be true.
D)   It is too difficult to achieve in practice if there is a multitude of different contracting parties.

Question 14

A pro-regulatory perspective would argue that accounting information will be provided.

Accepted Answer

A)   Freely, to protect the public interest
B)   According to the forces of demand and supply
C)   To reduce the costs of capital
D)   To reduce uncertainty about the firm

Question 15

Which of the following statements is true about accounting regulation?

Accepted Answer

A)   It is a set of prescribed rules that provides authoritative direction.
B)   It is developed by an independent authoritative body that has been given the power to govern how financial statements are to be prepared.
C)   It incorporates a basis for monitoring and enforcing compliance with the specific regulatory requirements.
D)   All of the given options are correct.

Question 16

Which of these arguments support the anti-regulation perspective?

Accepted Answer

A)   Private economic-based incentives
B)   Market for managers
C)   Market for lemons
D)   All of the given options are correct.

Question 17

Which of the following is a valid argument against regulatory capture?

Accepted Answer

A)   The regulated are best equipped to address the technical issues.
B)   The regulated are not independent from the regulator, and therefore lack neutrality and freedom from bias.
C)   The regulated are better able to understand the issues and need for regulation in specific areas.
D)   The regulation can be fast-tracked, because there is less time taken to argue the issues with other parties.

Question 18

Which of the following is not assumed by the 'market for managers argument' for reducing or eliminating regulation?

Accepted Answer

A)   The managerial labour market operates efficiently.
B)   Information about past management performance will be known by other prospective employers.
C)   Information about past management performance will not be fully impounded in future salaries.
D)   Managers are not approaching retirement.

Question 19

Which of the following may be the result of direct or indirect economic and social consequences of a proposed accounting standard?

Accepted Answer

A)   Increased lobbying to maximise the expected positive economic benefits from the standard
B)   Increased lobbying to minimise the expected negative economic and social consequences from the standard
C)   Impact on managerial decisions to optimise the reported numbers
D)   All of the given options are correct.

Question 20

Which of the following is not an argument for the regulation of accounting information by pro-regulation proponents?

Accepted Answer

A)   Regulation is needed because it is difficult to make 'free riders' pay for its production.
B)   Regulation is needed to prevent wasteful over-supply, because users will overstate their need for information if they do not have to pay for it.
C)   Regulation is needed to correct market failure and under-supply due to the reluctance of producers of information to charge 'free riders' for it.
D)   Regulation is needed because the price system cannot function properly if it is not possible to exclude non-purchasers from consuming the good.

Exam 3: The Regulation of Financial Accounting