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A few stylized observations on accounting discretion

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Purpose – The purpose of this paper is to explore the role of accounting discretion in a
principal-agent setting, wherein accounting information is used in performance evaluation. The agent
may choose one from among several allowable accounting methods. However, limited audit resources
allow only for verification of only the method the agent chooses, and this is the only one used to
determine the agent’s compensation.
Design/methodology/approach – This paper uses the model developed by Penno (1990) and
construct relatively simple examples that illustrate the effects of accounting discretion on performance
evaluation. These examples may make the implications of Penno (1990) clearer to educators and
practitioners.
Findings – Accounting discretion can be useful in performance evaluation even if the accounting
method chosen is not disclosed. Lower limits on compensation reduce the usefulness of accounting
discretion. If the principal declares a preferred accounting treatment, it enhances the usefulness of
accounting discretion; in fact, it guarantees that accounting discretion is weakly preferred to no discretion.
Practical implications – Accounting discretion is often viewed pejoratively. Those responsible for
designing performance evaluation schemes should be aware of the potential benefits of accounting
discretion, and those charged with promulgating accounting rules should consider the possibility that
rules can be too inflexible.
Originality/value – This paper provides accessible illustrations of the effects of accounting
discretion on performance evaluation and offer discussion to place the conclusions drawn from the
model into a standard setting context.

Keywords Performance evaluation, Agency theory, Accounting discretion, Performance appraisal,Accountancy

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Informasi Detail

Judul Seri

Accounting Research Journal

No. Panggil

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Penerbit

: Emeral Group., 2013

Deskripsi Fisik

Accounting Research Journal Vol. 26 No. 2, 2013 pp. 154-166

Bahasa

English

ISBN/ISSN

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Klasifikasi

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Tipe Isi

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Tipe Media

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Tipe Pembawa

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Edisi

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Subjek

AKUNTANSI

Info Detail Spesifik

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Pernyataan Tanggungjawab

Asmawati/Syahrial

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