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What is the political cost theory?


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2011-09-15 09:53:34
2011-09-15 09:53:34

political costs - are costs that groups external to the firm might be able to impose on the firm as a result of political actions

for example if a firm records high profits this might be used as an excuse for trade unions or lobby groups to take action for an increase in a share of that profit ie higher wages. therefore firms may adop income-decreacing accounting methods (watts and zimmerman (1978 p 115).

another example that may incur political costs may be envirnmental - such as polution and "carbon footprints". disclosured made by a firm in relation to there positive or negative impacts on their physical envirnment may also be a technique to reduce any political costs.

political cost theory thefore can also explain why many firms adop voluntary social and environmental discloures in there annual reports.

References:

Craig Deegan, "Australian Financial Accounting" , 2008, 5th edition, McGraw-Hill Australia, NSW.

Watts, R. L & Zimmerman, J.L,"towards a positive theory of the determination of accounting standards" The Accounting Review, January 1978, pp 112-34.

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