QUESTION 1

Read the article below and answer the questions that follow.

Drugs Code Set to Get Tougher

By: Emma Connors

The pharmaceutical industry faces a nervous wait as the competition regulator deliberates over proposed changes to the rules that govern the promotion of prescription drugs. The last review of the industry code of conduct resulted in major changes when the Australian Competition & Consumer Commission ruled innovative drug companies would have to publicly disclose the details of hospitality given to health professionals at educational events.

Companies found to have broken the rules at these events or in other promotions can be fined up to $200,000. Those fines are set to increase when the latest edition of the code takes effect in future. The draft code increases the maximum penalty for a breach of the code from $200,000 to $250,000 - a long way short of the maximum $1.1 million fine called for by the consumer organization Choice.

Choice argues the fines are not large enough to deter companies from irresponsible promotion because of the substantial revenue increases that can be gained if such promotion delivers the company even a small increase in market share. Medicines Australia, however, believes the other sanctions - including corrective letters to doctors and corrective advertising - that are imposed on companies that break the rules are often a better deterrent than fines.

Source: Excerpts from The Australian Financial Review, 4 August 2009, p.5, www.afr.com 3

a) Positive Accounting Theory models the political processes involving the relationship between the firm and other parties interested in the firm. How does the article demonstrate political processes? In your answer, explain what, if anything, firms in the pharmaceutical industry can do to manage political costs.

b) What is the potential impact of the increased fines on the content of the accounting reports of firms in the pharmaceutical industry, particularly in relation to accounting information?

c) What do you expect will be the impact of the increased fines in the

(i) earnings and

(ii) management compensation contracts, of firms in the pharmaceuticals industry?