ACCT6006-Contemporary Issues in Accounting Theory Assessment Answer

Question

1. One of the key points raised in the article relates to the increasing costs and shortages of workers in the construction industry was leading to an increase in insolvencies for businesses in this industry. What other reasons for insolvency can you identify from the article? Apply and explain relevant theories (minimum five) in accounting to discuss your observations and how they relate to what you have identified.

Answer 1.

There are various possible reasons of insolvency apart form the rising material cost and scarce labor. This includes extreme contingencies like pandemic or war. Any potential liabilities because of increase in supplies or labor prices shall be provided for using the theory of conservatism. This reason rejects the contingency theory. Related party transactions that are not on arm length price can prove to be deceiving for the genuine creditors. This act withholds stakeholder theory and legitimacy theory that deals with securing the interest of stakeholders (Freeman, Dmytriyev, & Philips, 2021). The changes in material prices after setting the fixed contracts implies implications of chaos theory. Unusual transactions which are neither commercial nor reasonable might also prove to be detrimental to the interest of commercial creditors like, special dividends or large investment in crypto. This will be governed by the agency theory which implies that the management shall act as an agent to the company working in the interest of owners for compliance of corporate governance (Dong, Karhade, Rai, & Xu, 2021).

2. Outline the major stakeholders who would be concerned with the continuous collapse of construction companies. Provide an explanation on each stakeholder identified and explain why you would consider these to be major stakeholders using examples that are in the context of the article.

Answer 2.

The stakeholders relevant to the given article are trade creditors, regulatory authorities, Insurer, state government, advocates, construction workers, supplier. The trade debtors are customers that paid the company for building houses who are usually middle-class people hardly having any extra savings. Worker’ compensation is regulated by the trade unions are preferred payables. The insolvency news failed their financial planning objectives of years. The regulatory authorities like ASIC and Australian constructor’s association will be a responsible party to act to the situation and come for the rescue of genuine debtors in getting their monies. The insurer Party will be responsible to release their part of duty to cover the extent of losses so insured. The government is required to apply any legal forces and intervene wherever required. Advocates’ work is at much risk while deciding the parties and potential results.

3. Suppose these companies that are mentioned in the article all had loans with financial institutions. What possible suggestions/reasons could you provide as to why the lenders would not have been concerned about potential insolvency issues of their borrowers?

Answer 3.

In case of insolvency, there are certain preferred payment which are cleared first on priority (Murniati & Selvya, 2019). Where the construction companies are dependent on the financial institutions for the funds, it will be included in the preferential creditors. This implies that after the secured creditors and workers’ compensation, banks and other alike institutions will be given priority. More to this, any transactions that are unusual and not commercial or with the related parties not at arms; length price can be reversed to pay off the preferred creditors. Because of these reasons, financial institutions are at least risk if lends to the potentially collapsing builder companies.

4. Explain by way of personal reflection what you found to be the aspect of your research into the theories and other related issues in the article that had the biggest impact on your learning, something that you realised or now feel that you understand more clearly. For example, you may have thought about these issues before, you may have observed similar behaviour to the matter before and that was important to you; you may have related the issue to a current development in the world – current affairs, your employment or you have been personally affected.

Answer4.

The construction industry is more prone to the contingencies like price increase or crisis, which however can be provided for in the contract through added escalation clause or negotiations provisions. The added risk is therefore more because of the intentions of the builder. Earlier, I believed that the general public’s interest has to be secured through compensation scheme and housing guarantee fund, but now I feel that the corporate governance compliance shall be strong enough to penalise the management at default. The application of transfer pricing can prove to be detrimental to the bad intentioned management of these companies.

References:

Dong, J. Q., Karhade, P. P., Rai, A., & Xu, S. X. (2021). How firms make information technology investment decisions: Toward a behavioral agency theory. Journal of Management Information Systems, 38(1), 29-58.

Freeman, R. E., Dmytriyev, S. D., & Phillips, R. A. (2021). Stakeholder theory and the resource-based view of the firm. Journal of Management, 47(7), 1757-1770.

Murniati, R., & Selvya, D. C. (2019). Separatist Creditors vs Preferred Creditors Rights in the Bankruptcy Case Based on the Decision of Constitutional Court of 2013. Fiat Justisia: Jurnal Ilmu Hukum, 13(3), 231-240.

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