Information Asymmetry And The Financial Reporting Decisions Essay

Information Asymmetry And The Financial Reporting Decisions Essay

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Commonly, profit maximization is offered as the proper objective of the firm. The intended users invest in the firm while keeping in mind the same ultimate objective. In addition, some users have specialised needs and will possess the authority to obtain the information to meet those needs. The “intended users” includes the stakeholders, defined as, all constituencies with a stake in the fortunes of the company. But there is no appropriate definition for the users.

The two main concepts before going into further discussion, the major one is the information asymmetry and the financial reporting decisions. The role of Information in a Market Economy is very important in order to improve operation of capital markets and to improve operation of managerial labour markets. (both the roles) The nature of all relevant and reliable information is incomplete always. Information asymmetries exist when some parties to a business transaction has an information advantage. There is a problem of Adverse selection exists in case of improving the capital markets operation, wherein one party has knowledge not possessed by the other. For instance, the financial reporting is required to convert inside information to outside information. The Moral hazard problem, exists during an occasion to improve operation of managerial labour markets, arises when some parties cannot observe all the actions of the other parties to the transaction. Accounting helps to monitor the behaviour of managers in case of a moral hazard problem. Both the role of information is very crucial in order for its existence and its survival. The role of information is considered very important due to the consequences of Enron collapse, recession occurred in the U.S. economy, in the y...


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...ncial reporting is a function of accounting regulations, and financial reporting decisions. The Accounting profession was not the only group to focus on the Australian Accounting Standards Board (AASB). Moreover, the manufacturer companies are likely to seek control of accounting regulation. The major interest groups are the Members of accounting professional bodies, Managers of companies (producer group) and the Government officials and politicians. Thus, the power of financial report remains with these self-interest groups and therefore, the process of calculation is not given importance at all, the constituencies are given utmost importance to choose the accounting standards as the power lies within themselves.“This is why the choice of accounting standards is better regarded as a conflict between constituencies than as a process of calculation.” (Scott 2012, 501)

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