Contemporary issues in accounting

This paper contains TWO Sections (Section B and C only)

Section B – TWO (compulsory) questions to be attempted                     40 marks weightage

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Question 1 – Please read the case below to answer the questions

Atlas Eléctrica (Atlas) was founded in a small shack in 1961 and, by 1976, grew to be the first listed company to issue shares on Costa Rica’s stock exchange, the Bolsa Nacional de Valores (BNV).

Since the mid 1980s, the Board of Directors has seen the benefits of having independent directors, including their fresh ideas and new approaches to the company. Of the current seven Board members, four are independent. The Chairman of the Board does not have any CEO responsibilities. His only means of influencing management are through the Compensation and the Audit committees and at the monthly Board meetings where financial results, budgets and strategy are analyzed and approved. Key senior managers are chosen based on professional and merit criteria. Remuneration of the Board members is approved by the Board itself with the aim to be within reasonable limits when compared to other companies’ compensation practices. There is remuneration paid for attending each Board meeting, normally held once per month. The executive compensation is fixed taking into consideration comparative market information, reviewed and approved by the Compensation Committee of the Board. Approximately 20% of the senior managers’ total compensation is linked to performance. To date, no stock options are granted to senior managers or Board members. The up-coming annual report will disclose the total amount distributed to directors and managers on an aggregate basis. Atlas has two Board committees:

Audit Committee with 4 members—3 directors (one inside and two external directors none being the Chairman of the Board) and a Fiscal Board member. A representative of the external auditors, a representative of the internal auditor and the CEO also are invited to attend Audit Committee meetings; and


Compensation Committee composed of 2 directors (one inside and one external member neither being the Chairman of the Board)


The shares of the company are listed in NYSE. The company finds that the current share price is fully reflecting the information about past prices and trading volumes. The company has also observed that the share price changes rapidly to accounting information as and when released.











  1. What are the elements of good corporate governance? (2 Marks)


  1. Critically evaluate the elements of corporate governance in  Atlas Eléctrica (Atlas)                                              (12 Marks)  (Maximum 300 words +/- 10%)


  1. Comment on the type of efficiency of the market in which the shares of Atlas Eléctrica (Atlas) is traded and the level of information value of accounting information in that market. (6 Marks) (Maximum 200 words +/- 10%)








Question 2


Enron’s directors had a legal obligation to protect and promote investor interests but had few other incentives to do so. But many analysts believe the company’s board of directors failed to carry out its regulatory role in the company and rejected its oversight responsibilities, causing the company to venture into illegal activity. The company went under an accounting scandal that resulted in billions of dollars in losses. Enron was, at one point, one of the largest companies in the United States. Despite being a multi-billion dollar company, Enron began losing money in 1997. The company also started racking up a lot of debt. Fearing a drop in share prices, Enron’s management team hid the losses by misrepresenting them through tricky accounting—namely special purpose vehicles (SPVs), or special purposes entities (SPEs)—resulting in confusing financial statements.

The problems started to unfold in 2001. There were questions about whether the company was overvalued, leading to a drop in share prices from over $90 to under $1. The company ended up filing for bankruptcy in December 2001. Criminal charges were brought up against several key Enron players including former chief executive officer (CEO) Kenneth Lay, chief financial officer (CFO) Andrew Fastow, and Jeffrey Skilling, who was named CEO in February 2001 but resigned six months later.


Explain the agency issue and agency cost referring to the case of Enron and suggest way how Enron could have controlled Agency issue.

(10 Marks) (Maximum 300 words +/- 10%)









Section C- One question (compulsory)                                                   40 marks weightage

High profile accounting and audit failures in the United States in 2001 and 2002 such as Enron and WorldCom led to significant change in the accounting regulatory framework in many countries. In this context

You are required to critically discuss the benefits of regulating the financial reporting practices with suitable examples.     (10 marks)  (Maximum 200 words +/- 10%)


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