Question

Compare and contrast the usage of market measures and accounting measures of performance in the context of management control?

(1,000words essay)

Answer 1

The results of this study corroborate the significance of accountants and financial statement in the role of
reporting risk. It is shown that there is a relationship between accounting risk, and market risk measures, meaning the accountant’s role in reporting information becomes more important than ever. In the absence of beta (i.e. forfirms without previous market returns, or forecasted returns), accounting information can be used to assess company-specific risk. The places great emphasis on the accountant to provide information that is both relevant and reliable.
Each measure in this study: earnings variability, leverage and dividend payout is based upon the
accountant’s interpretation of the underlying measurements used to calculate the measure. It is very important then for accountants to present their interpretation on information that is both relevant and reliable. Of course, perfectreliability and relevance is impossible to achieve, and the accountant faces a trade-off. It appears the results support the notion that there is information content in fair values that accountants incorporate into financial statements through the measurement perspective (Scott, 2006). The use of the measurement perspective would suggest all balance-sheet items be recorded at fair value to be entirely relevant to decision makers. This would ensure there are no off-balance sheet itemsthat investorscould use to evaluate risk. If all debt, for example, were recorded at fair value, the leverage ratio would be more relevant. This relationship also holds true for dividend payout ratio and earnings variability. It appears a transition to more fair-value based accounting will provide for an even stronger relationship between beta and accounting risk, as the increased relevance of the measurement perspective will be more useful to investors in assessing firm-specific risk