5.1 What is the underlying assumption of positive accounting theory, and how can it be used to understand the problems that exist between owners and managers? (LO2) 5.2 Explain what an agency relationship is, and explain the following costs: monitoring costs, bonding costs, residual loss. (LO2) In-Class Activities 5.14 How can corporate disclosure policy be used to maintain or regain organisational legitimacy? (LO4) 5.15 Why would managers decide to voluntarily disclose environmental performance information in an annual report? (LO7) 5.17 Stakeholder theory proposes that it is important to harmonise or balance stakeholders' needs and expectations. Choose two stakeholder groups and evaluate how a company can balance the views of these shareholders in its dealing with them. (LO5) 5.23 You have recently been appointed as a lending officer in the commercial division of a major bank. The bank is concerned about lending in the current economic environment, where there has been an economic downturn. You have been asked by your supervisor to provide a report indicating how you can safeguard the bank against the risks of lending. In your report you should outline how covenants in debt agreements can be used to reduce the risks, what agency problems the bank should be concerned with, and how accounting information can be used to assist in this process. (LO2) ACC301 Contemporary issues in accounting Questions to accompany: Contemporary issues in accounting 2e by Rankin et al. Questions 1. One of the problems in the shareholder/manager agency relationship that pay contracts are designed to overcome is the horizon problem. Outline what the problem is and how the contract between managers and shareholders can be designed to reduce the horizon problem. 2. The article highlights the excessive use of bonuses to encourage shore-term decisions. From an agency perspective, why would managers prefer short-term cash bonuses instead of long-term equity bonuses? What problems does this approach lead to for the board of directors and shareholders? In presenting your answer you should refer to relevant information in the above article to support your view. 3. Why would managers prefer short-term cash over long-term equity bonuses? Why does this not align with shareholder interests? Explain your answer. ( LO2)