ACCT 2217: Horizon Problem - Central Assumption of Positive Accounting Theory - Accounting Assignment Help

Assignment Task:

The assessment allows you to explain and justify your applications of relevant theories into complex ‘real world’ case to solve accounting and business ethics-related issues, to both accounting and non-accounting audiences. Moreover, this assesses the role of accounting as a social practice that embraces a higher level of accountability frameworks.

Background Information (ACCT2217)
The following was extracted from an article that appeared on ‘The Sydney Morning Herald- online, 15th August 2019, written by Jennifer Duke.
 
Telstra CEO Andy Penn's pay packet soars 34 percent to $5 million
 Telstra chief executive Andy Penn’s pay packet increased 34 percent to $5 million last financial year, despite sharp falls in profits and dividends at the nation's biggest mobile carrier. The pay bump comes just a year after shareholders revolted over executive pay, handing the telco a 'first strike' vote over the bonuses paid to Mr Penn and his senior management team.

Mr. Penn's overall remuneration, including bonuses and fixed pay, increased 33.6 percent to $4.998 million in terms of actual pay following two years of pay cuts. Last year, Mr. Penn received a total of $3.74 million, down from $5.2 million in 2017 and $6.76 million in 2016.
The figures were published as Telstra reported its full-year results for 2019 on Thursday, revealing a sharp drop in operating earnings and a 40 percent slump in net profit while warning shareholders to brace for an even bigger impact on its bottom line next year as a result of the National Broadband Network.

Telstra is disclosing "actual pay" to provide more transparency for shareholders, its financial report said. But as many senior executives changed roles over the past 12 months, this voluntary information has not been provided for other senior executives.
When calculated in line with the Corporations Act, Mr. Penn's salary increased from $4.56 million in 2018 to $5.12 million in 2019.

Mr. Penn revealed a radical turnaround strategy, called Telstar 2022 or T22, in June 2018 after five-year lows in the share price led to an investor revolt on executive pay and outcry from shareholders about the company's performance.
The plan included simplifying the telco's internet and mobile plans, the creation of an InfraCo division to handle infrastructure and cost reductions, such as slashing 8000 staff from Telstra workforce.

Telstra shares have recovered strongly over the past 12 months after hitting multi-year lows. The stock has gained about 40 per cent from $2.89 this time a year ago, to as high as $3.99 last month.

Its shares closed down 1.78 percent to $3.87 as investors sold off equities in general amid rising fears of a global recession. The telco's share price peaked at $6.59 in February 2015 and has since faced headwinds, including the rollout of the NBN putting pressure on profit margins and growing competition for mobile customers keeping prices low.

Telstra chairman John Mullen last year defended paying executives millions of dollars after the biggest swing against the pay packets in a decade at the telco's annual general meeting, saying it was the "lowest salary Telstra has paid a CEO in over eight years". The payments at the time were cut due to the poor share price performance.

Mr. Penn said the board and remuneration committee made all the decisions around executive pay and took into account a lot of advice and consideration.

REQUIRED: (ACCT2217)

(a)The article states “Mr. Penn's salary increased from $4.56 million in 2018 to $5.12 million in 2019”.  Explain this salary increment as per the bonus plan hypothesis perspective of Positive Accounting Theory.

(b)What is the Horizon problem? Is there a “horizon” problem as per the above article?  Explain your answer.

(c)Do the agency problems such as horizon problem, risk aversion problem depend on an individual’s culture? Explain your answer using the societal value (cultural) dimensions identified by Hofstede (You need to use at least two of the four initial dimensions).

(d)The central assumption of Positive Accounting Theory (PAT) is that all individuals’ actions are driven by self-interest and that individuals will always act in an opportunistic manner to the extent that the actions will increase their wealth. Is this assumption realistic? Explain your answer using the societal value (cultural) dimensions identified by Hofstede (You need to use at least two of the four initial dimensions).
 

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