accounting theory paper (in progress)

SUMMARY - article

The article discusses the suspension of two Canadian Imperial Bank of Commerce investment advisors of profiting from insider information on four M&A takeovers. The information had been passed on from a former partner at Davis Ward Phillips & Vineberg. The potential profit of these trades was estimated around $3 million Canadian. The news of the suspension caused share prices to decrease by 2.3%.  Two employees of TD Waterhouse were also accused of illegally trading. The insider trading enforcement record has been previously criticized due to its failure to secure convictions.

WHY INFO ASSYMETRY NEEDS TO ME MINIMIZED (taken from midterm exam)

The main issue at hand is the problem of information asymmetry. In this case, insiders had an unfair advantage in the market to shareholders. When the market is not considered to be a level playing field, estimation risk increases and investors are inclined to withdraw from the market or to bid down the share price, which was the case here. In either case, the result is less capital is allocated to deserving companies.  To encourage investment, the government must intervene and introduce or improve regulations or change accounting standards to require a greater degree of disclosure.

INTEREST GROUP THEORY (ch 13)

Interest group theory can be applied to this case. There are a variety of different interest groups who have much at stake in the outcome of this situation. The shareholders are the primary reason why more regulations may be imposed, or why existing regulations may be improved. If shareholders are unhappy with a seemingly unfair market, they will invest less, causing less capital to be distributed, with the result that the firms will not get the funding they need to grow their businesses. Reducing adverse selection also improves the functioning of capital markets and the public benefits (page 445). However, those involved in management and in smaller businesses may dislike the idea of more regulation imposed on them, and may have incentive to lobby against more governance. The political authority will make the final decision based on what it stands to gain from each scenario.

INCREASING AND IMPROVING REGULATIONS – to secure convictions – “internal failure” cost

As noted in the article, the primary concern with this situation is the court’s inability to secure convictions of the offenders.  The intricate details of problems within the court system are a legal matter, so there is little that the field of accounting can do after insiders behave unethically or break the rules.  

The difficulty of securing convictions may stem from the high court costs associated with pursuing these cases. It seems that the solution is to invest in prevention measures to curb the problem, rather than relying on the courts. This comes in the form of adapting accounting standards in order to deter insider trading.

CHANGING ACCOUNTING STANDARDS (ch 12, page 444) – a “prevention” cost

The process of changing accounting standards should be considered in the light of decision usefulness, information asymmetry reduction, economic consequences, and other criteria used in the standard setting process.

Requiring companies to disclose potential takeovers more readily in their financial statements serves as a way to prevent inside trading. With less information hidden from the public, the importance of ethics of employees and management is decreased. Further, changing these accounting standards would be much less costly than trying insider traders in court. The rules regarding insider trading on takeover information are currently described in principle-based standards (page 492) that rely on the application of professional judgment. Due to the nature of inside trading, rules cannot be described within a specific set of rules. Requiring the disclosure of takeovers would supplement the current principle-based standard and leave less room for questionable professional judgment.

A takeover would be considered proprietary information, and thus will affect the future cash flows of a company. Disclosure may also impede on a company’s ability to gain a competitive advantage by forcing it to disclose too much before deals have been made. However, such a change would increase decision usefulness for investors because it would allow them to grasp more of each firm’s prospects. 

I lost my wallet.

It's a crisp Wednesday fall morning - the perfect circumstances, I'm sure you'll agree, under which to visit the local vet clinic to replenish one's supply of cat food.

So that's what I'm doing today. Honestly, buying cat food from this place isn't my favorite thing to do, since one time I did so, the woman at the front desk gave me a hard time about not neutering my cat on the exact six month anniversary of him being expelled from his mother's womb. And I secretly hold grudges.... for a very long time. In fact, this is why I have cats. And since my cats are usually my only source of companionship, I figure I need to feed them since they wouldn't provide as much comfort if they starved to death.

I walk into the vet clinic. There is no one at the front desk, and there is one man in front of me. Seeing me walk in, he figures he should ring the bell to alert someone of our presence. He does so, but he doesn't really do it very well, and the bell hardly rings. I read the look on his face; he KNOWS he failed, but doesn't want to look like an ass and try again, so he's going to wait this out and hope that whoever works at the front desk has very good hearing.

We wait about three minutes, it is pretty obvious no one is coming. Another person enters the clinic and lines up behind me. Three more minutes. A guy dressed in camouflage comes in, carrying his cat. For some reason, this is amusing to me.. but I stay focused. Two more minutes. The guy at the front must face the fact that he did not ring the bell loudly enough, since it's almost been ten minutes since he rang the bell. So, he picks it up and does a better job at alerting the secretary, as she comes out from the back immediately. He questions her about whether she has a large bag of dog food. She says she does. This surprises him. He does not actually want to buy it, he was merely wondering if she had it in stock. He leaves empty handed. I make a mental note to add him to my list of people I will never forgive. I step up to the counter.

It's HER.

Secretary: How may I help you?

Me: I need some of that diet cat food.. I think it's called WD. For Kira and Maggie... (and Charlie and Thundercat......)

Secretary *checking the computer*: Okay.. do you want the biggest bag again?

Me *solumnly, in a I-haven't-forgiven-you tone*: Yes, please. 

The secretary walks into the back, comes out carrying a large bag of cat food, almost throws it down on chair since she clearly finds it heavy, rings through sale.

Secretary *sizing me up incredulously - haha, I got that word from Twilight!*: Are you sure you can handle that? It's quite heavy.

Me *putting my wallet in my pocket*: Oh yeah, no problem!

Well, here we go - I have something to prove, don't I? I'm going to show her. Flexing my muscles considerably, I bear down on the bag of cat food and pick it up with apparent ease. She will be so impressed, she will regret ever telling me that I did not neuter my cat early enough. She will worship me.

I take note how little effort I actually make because I am very, very strong due to riding horses. Oh, how I love surprising people with my undeniable vigor. But is it enough to only walk to the car with this cat food? No, of course not. In order to REALLY impress them, I am not only going to carry the large bag of cat food to my car, but I'm going to run with it. Then everyone here will understand how strong and agile I really am.

So that's what I do - I run to the car with the cat food. In my mind, I look like Vin Diesel or The Rock, lifting a car over my head. Deep inside I know that, in reality, I probably look more like the scraggly, insane cat woman that I am, running down the street with this huge bag of cat food. I place it lightly in my backseat and drive home. It is only a half hour later that I realize that my wallet is missing. I look around a bit; it is no where to be found.

Panic ensues.

After fifteen minutes of hysteria, I drive back to the vet clinic and amble in, and ask the secretary in a defeated voice, "did I leave my wallet here?". She pities me, I can tell. And I didn't, so I go back home and cancel all my credit cards. It's necessary. Think of all the things the thieves could buy with that $150 of credit I have left. I realize that my wallet fell out during my display of awesomeness of running to my car.

Fifteen minutes after canceling my cards, I get the email that says someone has found my wallet. Someone who was not a thief.. not that it would have mattered anyways.

Blog design - my vision.

I have chosen a simple maroon theme as to not distract you from all the meaningful things I am about to say.