Term Paper: Accounting Policy Setting Using Ex-Ante

Pages: 10 (3205 words)  ·  Style: Harvard  ·  Bibliography Sources: 10  ·  Level: Master's  ·  Topic: Accounting  ·  Buy This Paper

SAMPLE EXCERPT:

[. . .] The team likes this form of efficiency, especially if they are from a small market, because it gives them some cost control with players who may cost too much to retain if they wait too long to sign a contract.

For any type of contract there are going to be transaction costs. With the example above, the player will possibly lose some money in the long-term and the team could pay the price of a permanently injured player. Artz and Norman (2002) say that "transaction costs' can include both the ex-ante costs of initially establishing the contract, and the ex-post costs of periodically renegotiating and adjusting existing contracts" (Artz & Norman). For the example mentioned above, the ex-post transaction costs are minimized if the team signs the player for a long enough period of time because they have the option of cutting the player at the end of the contract if he or she has aged out of the sport. There is always an opportunistic side to any contract issue.

In business, this is also the same. Firms "can benefit, ex-ante, because they get something…valuable… -- the ability to recruit and retain talented managers and employees, and to inspire them to far greater effort and investment in the firm than any formal contract could" (Stout, 2002). A firm has to have a certain number of employees who are hired to do the jobs required to produce a certain product or provide a service. Prior to beginning work, the employee is hired at a certain wage that is most likely determined by the prospective employee's prior work experience and the scale for that job description. The contract negotiation is tricky for both sides because the company wants to minimize the experience and place the employee low on the scale, and the employee wants to do the opposite. The company is trying to minimize ex-post opportunism in the part of the employee which can happen if they do a superlative job and require a substantial raise.

This is also true of making policies. "Real-world data can only inform us of reactions to policies that already exist, whereas the policymaker's perspective demands ex-ante insights of likely reactions to policies that could exist" (Kachelmeier & King). Policy makers would like to know, as would most anybody, what is going to happen based on a decision. This can only happen if there is reliable data about similar policy decisions that were made in the past. The empirical data used in ex-ante logic is actually ex-post for someone else. According to Prescott (2006) "it is best to choose, at each point in time, policy action that is best given the current situation and the rules by which policy will be selected in the future. The optimal policy is time-consistent." Policies cannot be made based on what has happened before, exclusively, or what is going to happen in the future. But, for the best ex-ante efficiency, firms will choose the data that will give the best possible policy when looking into the future.

Ex-Post Opportunism

The problem with only working toward ex-ante efficiency, is that it could result in opportunism on the part of one contracting partner or another. According to research conducted by Artz and Norman (2002) a "factor influencing contract choice is transaction-specific assets. The distinguishing feature of these assets is that they have little use or value outside a particular relationship. As a party increases its investment in transaction- specific assets, it becomes increasingly dependent on the other to realize the value of its investment. Thus, the investing party is increasingly vulnerable to opportunistic behavior by its exchange partner. To protect itself, a firm often attempts to establish contracts that will safeguard its investment."

This is more of a relational argument, but it fits into the spectra of the positive accounting theory also. Looking at it from a strictly self-interest perspective, the contractors are trying to set up an agreement that will benefit each individually the most. The only reason that they are contracting with someone else at all is because it adds financial or intangible assets to their ledger. Therefore, both parties want to minimize the vulnerability they have for opportunistic behavior on the part of the other party. However, this agent cannot be overlooked, as a positive aspect of the contracting process, according to positive accounting theory.

Although this theory is more about gathering hard data and being able to make the right accounting decisions based on that data, there is also a part of the theory that looks at the opportunism aspect ex-post. One researcher says "Looking at revenue models, it may be true that on an ex-post basis, better statistical estimates can be found, but that does not necessarily imply that ex-ante forecasts are irrational or inefficient" (Swidler, 2007). This seems like an endorsement for both ex-ante and ex-post decision making, but it is actually showing to the reader the benefits of ex-post methods vs. ex-ante methods. Swidler (2007) is saying that data can be gathered ex-post that is useful in subsequent revenue decisions, and this logic can be carried to other realms of accounting. Ex-post opportunism is enhanced by data from the policy implementation to see if the contracts made were as beneficial as they could have been. It must be recalled at this point that one of the main tenets of the positive accounting point-of-view is that people are self-interested and they act that way. It can also be said of firms. The firm has to be self-interested because that is the only way that it can survive. No one else is going to look to the best policy implementation practices for another firm because they are concerned about their own decisions. That opportunism can become greed is inherent in the capitalistic system, but there are now laws in place and great penalties assessed for ex-post opportunism run amok. Since this is controlled, the firm can then look to be opportunistic in an ex-post fashion because the managers of sad firm are always trying to determine ways that they can squeeze a little bit more money out of the contract. This may also sound somewhat like efficiency, and the two are not far separated. Efficiency is just the by-product of a firm's acting in a self-interested, opportunistic manner.

Ex-post opportunism allows the firm to take in the data from the policy decisions and make better ones that are more advantageous to the firm in the long-term. This may mean that firm looks at a particular decision and believes that if they "go green" they will make more money in the contract. So, when the contract is renegotiated, the firm will put in a clause that includes the aspects of environmentally sound practice. Opportunism looks at the data that is gathered and determines ways that new policy decisions can be made that will benefit the firm. It is cynical to believe that every initiative conducted by a firm is based on its opportunism, but it is naive to believe that a firm never acts opportunistically. One of the main reasons that companies try to become more efficient is that they realize that the more efficient the business is, the better it will perform financially.

Conclusions

The two strategies have some elements in common, but they also have much that is dissimilar. Since the commonalities do not suggest which is the best for policy making purposes, it is easiest to look at the dissimilarities to make a decision regarding the efficacy of one over the other. Ex-post opportunism seems to be a situation in which data is taken from a policy decision that a firm previously implemented to see where they can better take advantage at a later date. Ex-ante efficiency is less concerned about doing better than the other guy and more about what will make the firm better in the long run. Although both types of decision making will make a form better, at least in theory, ex-ante efficiency seems to clearly be the best strategy. If another firm believes that it is being taken advantage of just to increase the opportunity of the other, they may not do business with each other again. Relational theory would suggest that ex-ante efficiency is better for this reason. Behavioral theories would also say that the ex-ante approach is better because it does not sacrifice the integrity of the firm which is a danger when an opportunistic stance is taken. Positive accounting theory show the merits of each approach because they both use data to back up decisions, but combining that with other theories shows a clearly better way to conduct business.

References

Artz, K.W., & Norman, P.M., (2002). Buyer-supplier contracting: Contract choice and the ex-post negotiation costs. The Journal of Managerial Issues, Vol.… [END OF PREVIEW]

Four Different Ordering Options:

?
Which Option Should I Choose?

1.  Buy the full, 10-page paper:  $28.88

or

2.  Buy + remove from all search engines
(Google, Yahoo, Bing) for 30 days:  $38.88

or

3.  Access all 175,000+ papers:  $41.97/mo

(Already a member?  Click to download the paper!)

or

4.  Let us write a NEW paper for you!

Ask Us to Write a New Paper
Most popular!

Accounting Research in the Past Decade Term Paper


Accounting Ethics Research Paper


Forensic Accounting in Practice Research Paper


Politicization of Standard Setting Term Paper


Accounting Earnings and Profits Essay


View 1,000+ other related papers  >>

Cite This Term Paper:

APA Format

Accounting Policy Setting Using Ex-Ante.  (2012, April 1).  Retrieved May 21, 2019, from https://www.essaytown.com/subjects/paper/accounting-policy-setting-using-ex-ante/6278036

MLA Format

"Accounting Policy Setting Using Ex-Ante."  1 April 2012.  Web.  21 May 2019. <https://www.essaytown.com/subjects/paper/accounting-policy-setting-using-ex-ante/6278036>.

Chicago Format

"Accounting Policy Setting Using Ex-Ante."  Essaytown.com.  April 1, 2012.  Accessed May 21, 2019.
https://www.essaytown.com/subjects/paper/accounting-policy-setting-using-ex-ante/6278036.