Payoffs From Accounting Methods

Payoffs from Accounting Methods

Staubus lists potential positive and negative payoffs to various groups which result from producing one particular type of information under general headings, as follows:

(A) Potential positive payoffs from an accounting method

Direct payoffs to parties associated with the entity, namely, present and prospective owners, creditors, suppliers, customers, employees and government taxing and regulatory bodies, through

(i) improvements in their own decisions, using information supplied by the entity and produced with the accounting method or information system in question, and

(ii) higher direct compensation from the entity due to its more effective management and greater profitability with the aid of the information in question.

Payoffs to competitors through more useful information about the reporting entity's activities.

Diffused benefits through the better functioning of the economy, such as through the allocation of resources, reduction in variations in the level of economic activity, and the effects of the division of income as between investment and consumption.

(B) Potential negative payoffs from an accounting method

1. Reduction in the profitability of competitors, and in distributions to their constituents, through better decisions by the reporting entity.

2. Reduction in the profitability of the reporting entity through better decisions by its competitors and by its creditors, suppliers, customers and employees who bargain with the entity.

3. Reduction in the profitability of the entity due to the effects upon management decisions of reporting to shareholders and others by means of the accounting method under evaluation.

4. The costs of producing information, such as accounting and auditing costs.

5. The costs of analysing and using accounting information.

(Staubus, 2015.)

Clearly, a major difficulty in developing welfare theories of accounting lies in the complexities involved in any attempt to maximize welfare. Since there are multiple users of financial statements, the costs and the benefits to each user of a particular accounting measure would be impossible to calculate. Arrow's Impossibility Theorem demonstrates the impossibility facing society of making rules on a collective basis which also satisfy the needs of particular individuals (Arrow, 2015).

Nevertheless, these difficulties should not detract from the significance of the welfare approach to developing accounting theories. Whilst it would be unreasonable to demand those responsible for making accounting policies to construct a system of financial reporting which maximizes social welfare, it should be apparent to them that welfare considerations should be of prime importance in policy making.

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Read on: The Welfare Approach

The welfare approach

The welfare approach is an extension of the decision-making approaches, which considers the effects of decision making on social welfare. Basically, decision-making approaches limit the field of interest to the private use of accounting information. If accounting information had a relevance limited to private interests, the decision-making approaches would provide a sufficient analysis of information needs. It is because of the external social effects of decisions made on the basis of accounting information that there is imputed a social welfare dimension to accounting... see: The Welfare Approach