1. Running Head: ACCOUNTING THEORY 1
Accounting Theory
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2. ACCOUNTING THEORY 2
Coles Boss Lashes Suppliers, Saying Woes are of Their Own Making
Article Summary
Some local Australian manufacturers are claiming that supermarkets are undermining the
growth of Australian based manufacturers by sourcing products from foreign-based suppliers,
which has led to local based suppliers such as Heinz cutting jobs. However, the Boss of Coles
McLeod argues that the claims of those local manufacturers are meant to cover up their failures.
McLeod further states that the suppliers his firm has been working with have seen their
businesses grow by over 200 percent in the last three years and that Coles was not favoring
foreign made products, as alleged by local manufacturers.
Accounting Theory
The article highlighted above that is written by Blair Speedy and titled “Coles boss lashes
suppliers, saying woes are of their own making.” espouses themes that can be linked to
stakeholder theory. A firm holds relationship with numerous stakeholders of the firm. The
relationship between the firm and various stakeholders of the firm is meant to enhance the
success of the firm and at the same time influence the performance of the stakeholders in
general. According to Elijido-Ten (2007) stakeholders theory proposes that the success of a firm
ties to the successful management of all the relationship has with its stakeholders. In this case,
supermarkets have an obligation to ensure that local based suppliers thrive and at the same time
ensure that consumers buy quality goods at reasonable prices.
Application of the Theory
According to Freeman (1984), a stakeholder is a group or an individual who can affect
achievement of an organization’s goals and objectives, or be affected by the activities of the
firm. In this case, the activities of supermarkets such as Coles affect Australian consumers and

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suppliers in Australia. Similarly, activities by the stakeholders, suppliers and consumers in
Australia, affect business performance of supermarkets in Australia. Freeman (1984) continues
to observe that the application of stakeholder theory gives an insight as to how firms operate in a
rapidly changing business atmosphere. Supermarkets in Australia form relationships with
suppliers, consumers and shareholders. The suppliers supply goods to supermarkets, and
supermarkets inward retails the goods to consumers. The supermarkets have a delicate balancing
act to ensure that it engages in activities that are of benefit to all stakeholders. A case opined by
Freeman (1983) who opines that business managers have the moral obligation of managing their
businesses for the benefit of all stakeholders despite whether stakeholder management impacts
positively on the financial bottom line.
Therefore, managers of supermarkets have a moral obligation to provide consumers with
quality and value, and also facilitate suppliers to grow their businesses. In the case of the
happenings reported by the article, supermarkets have resorted to importing goods from abroad
where they are cheap with the aim of passing the benefit to the consumers. Woolworth, for
example, though states that it prefers to source products locally imports goods identical goods to
the ones produced locally because of overseas products are cheap and therefore passing reduced
benefit costs to consumers. Though importing goods that are produced locally hurts local
suppliers, it is beneficial to consumers who enjoy quality at reduced prices. Conversely, McLeod
states that Coles partnership with local suppliers such as Bega Cheese has impacted positively on
the financial and business performance of local suppliers. McLeod states that produce growers
supplying produce to Coles have seen their businesses grow by over 200 or 300 percent in the
last three years, creating more employment for the locals. Therefore, the failure of local

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manufacturers should not be blamed on relationship between supermarkets and supplier, but by
the inefficiency of local suppliers.
Conclusion
Stakeholder theory explains the behavior of supermarkets to their stakeholders, namely
consumers and suppliers. Supermarkets are required to play a tricky balancing act of promoting
locally based manufacturers, who are inefficient in their production process, and providing
consumers with quality and value. Supermarkets have chosen the latter, importing cheap goods
from overseas and retailing them at reduced prices, and therefore, passing benefit costs to
consumers.

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References
Elijido-Tem, E. (2007). Applying stakeholder theory to analyze corporate environmental
performance: evidence from Australian listed companies. Asian Review of Accounting,
15(2), pp.164-184.
Freeman, R. (1983). Strategic management: a stakeholder approach. Advances in Strategic
Management, 1, pp. 31-60.
Freeman, R. (1984). Strategic management: a stakeholder approach. Pitman: Marshall.

6. ACCOUNTING THEORY 6
Wager on Weight Watchers in Sights
Article Summary
SAC Capital Advisors LP, which was founded by Steven A Cohen, is being accused and
investigated by the Securities and Exchange Commission and Federal criminal authorities for
insider trading in numerous trades the hedge fund has closed. The recent option trade involved
SAC and Goldman Sachs Group, as a counterparty, on an option trade on Weight Watchers
International Inc on 14 February 2011. Three days after the option trade, Weight Watchers stock
surged to close at $ 65.39, earning SAC Capital a profit of about $8.3 million, raising suspicions
on the trade. The hedge fund is also involved in InterMune insider trading probes.
Accounting Theory
The market hypothesis theory proposes that market participants in the financial market
there is symmetry of information, as all players receive and act on relevant available market
information simultaneously, and thus all stocks reflect all available information in the market.
Therefore, it is difficult for an investor to beat the market, except by insider trading which is
illegal, because the prices of stocks reflect publicly available information and expectation of all
investors. Fama (1970) explain that perfect information in financial markets would mean no
investment strategy would earn investors excess return above the market. In addition, the
efficient market hypothesis explains that there are three forms of market efficiency, namely weak
form of efficiency, semi-strong form of efficiency and strong form of efficiency. The weak form
of efficiency states that an investor cannot predict stock prices using past prices since stock
prices incorporates past prices in today’s price. The semi-strong form of efficiency state that an
investor cannot predict stock prices using available information that is in the public domain. The

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strong form of efficiency states that stock prices reflect all information, private and public, and,
therefore, insider trading cannot beat the market.
Application of the Theory
According to Jung (2005), the efficient market hypothesis suggests that stock prices
follow the idea of random walk. In such, if the flow of market information is unhindered and
incorporated in stock process, then tomorrow market information will be reflected in tomorrow’s
stock price independent of today’s stock price. Because market news and information is
unpredictable, therefore, stock prices should move in an unpredictable and random pattern.
However, since markets are not efficient, investors can profit from secret material information
that once released to the public will materially affect stock prices. Arestis (2006) observes that
insider trading undermines the random walk pattern of stock prices because using secret
information that is not available to the market an investor can make excess returns above the
market. The option trade executed by hedge fund SAC Capital was suspicious since it came three
days before the release of a surprise-earning announcement.
The surprise-earning announcement lifted Weight Watchers International Inc stock by 46
percent to settle at $65.39. It is probable that the trade was made with the full knowledge of the
impeding material information, and because markets are not efficient, SAC Capital illegally
profited from trading on the secret information. Though, SAC Capital had in the first quarter of
2011 purchased 2.6 million shares of Weight Waters Inc, the option trade is suspicious because it
happened so quickly that even Goldman Sachs, the counter-party, had not taken a hedge on its
position. In addition, SAC Capital has been reporting annualized returns of over 30% for the past
20 years and also under an insider-trading probe involving suspicious trade by one of SAC
affiliate ahead of drug trial results by InterMune Inc.

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Conclusion
The market hypothesis theory explains the suspicious behavior of SAC Capital. In a
market that is not efficient, investors can earn excess returns using material information that is
not in the public domain, in what is termed as insider trading. It is probable that SAC Capital
entered in the option trade with full information that Weight Watchers Inc was going to make
public material information, in a few days, that would rally the stock, hence profit from the
inefficient market.

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References
Arestis, P. (2006). A handbook of alternative Monetary Economics. New York: Edward Elgar
Publishing.
Fama, E. (1970). Efficient capital markets: a review of theory and empirical work". Journal of
Finance, 25(2), pp. 383–417
Jung, J. & Shiller, R. (2005). Samuelson's Dictum and the stock market. Economic Inquiry, 43
(2), pp. 221–228.

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Australia's disclosure regime has 'inherent weaknesses': ASIC
March 25, 2013
• Read later
Gareth Hutchens
Read more: http://www.smh.com.au/business/australias-disclosure-regime-has-inherent-weaknesses-asic-
20130325-2gp61.html#ixzz2RPUumzm7
The corporate regulator has admitted that Australia's disclosure regime has "inherent weaknesses" that
failed to prevent investors losing "a lot of money" on complex financial products.
It is considering requiring investors to prove they have a basic level of understanding before they can
invest in such products.
Australian Securities and Investments Commission chairman Greg Medcraft said wholesale and retail
investors have "lost a lot of money" on complex instruments since 2008.
These products include financial derivatives such as "collateralised debt obligations (CDOs)" and "CDOs
squared".
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"Wholesale and retail investors were unable to understand or value the risks inherent in these products,"
Mr Medcraft said.
"Complex products, due to their nature, can be difficult for investors to understand. This can lead to them
being mis-sold, particularly when investors are searching for yield."
Speaking at the ASIC annual forum in Sydney, Mr Medcraft said the agency was considering ways to
best regulate such products.
This included requiring investors to prove they understand how such products work before they can invest
in them.
"For example, e-learning modules which explain the key features and risks of a product could be used to
educate potential investors about a product," he said.
"This could overcome the inherent weaknesses in traditional disclosure methods. An online assessment
model could then be used to assess the person's understanding before they invest."
ASIC has been heavily criticised in recent years for allowing complex financial instruments, such as
CDOs, to be sold to unsophisticated investors.

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In November, the Federal Court found in favour of 13 NSW councils in relation to the sale of complex
financial instruments widely criticised for their role in the financial crisis.
The councils were awarded more than $20.2 million in compensation and legal costs after the court found
they were misled by S&P ratings agency, ABN Amro Bank and Local Government Financial Services
about products nicknamed "Rembrandt notes" in the lead-up to the financial crisis.

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Australia's Disclosure Regime Has 'Inherent Weaknesses': ASIC
Article Summary
The Australian Securities & Investments Commission has been heavily criticized, with
some investors suing for compensation, for allowing sophisticated financial instruments such as
financial derivatives to be sold to unsophisticated investors, leading to huge losses on the part of
the investors. The unsophisticated investors, who were both retail and wholesale, were sold
products such as collateralized debt obligations without understanding the mechanics or the risks
of the products. The Australian Securities and Investments Commission has admitted the need to
introduce investor education programs to educate potential investors about sophisticated products
in the market in addition to enhancing disclosure requirements.
Accounting Theory
Markets fail to follow the demand and supply forces necessitating the intervention of
governments or government agencies to correct market anomaly. The anomaly is corrected by
regulatory bodies that enforce regulatory frameworks and rules. According to Belkaoui (2004),
regulations are acquired by a specific industry and for the benefit of that industry. There are three
sets of theories of regulations, namely private interest theories, public interest theories and
capture theories or interest group theories. The public interest theories of regulation propose that
regulations are enforced in response to public demand to correct inefficiency in the market
dynamics. The private theories of regulation propose that regulations sprout as a result of
individual behavior among individuals or groups to maximize their personal interests. The
capture theories of regulation assert that regulations are enforced to protect special-interest
groups (Stigler, 1971).

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Application of the Theory
The Australian Securities and Investment Commission is a corporate regulator that seeks
to protect the interests of investors and the general public participating in Australian capital
markets. This because if market dynamics are left to operate on their own, the public and
investors will bear the blunt of market anomalies; therefore, there is a need for a regulatory body
to ensure that public interests and investor interests are safeguarded by the market. Failure by
Australian Securities & Investment Commission to regulate the sale of complex financial
product, such as financial derivatives, to unsophisticated investors led to huge losses to that class
of investors. As a result, Australian Securities & Investment Commission, commonly known as
ASIC, has been heavily criticized for failing in its primary role of regulating products sold to
investors. For this reason, 13 NSW councils went to the Federal Court seeking compensation and
the court ruled in their favor granting them $20.2 million after the court established that the
investors were given falsified information by a rating agency, a bank and a financial services
company. ASIC, therefore, failed to safeguard the interests of both the public and investor
community and to keep up with the tenets of public interest theories of regulation and capture
theories of regulations because it did not want investors in advance of the inherent risks
associated with investing in complex financial products such as collateralized debt obligations.
Posner (1974) argues that when the market fails to self regulate itself a government body
in the form of a regulatory body should regulate the market. In the case of Australian capital
markets, the Australian Securities & Investment Commission is the regulator of the capital
market in Australia. ASIC in its execution of its regulatory duties to safeguard public interests
and investor interests, as per the public interest theories of regulation and capture theories of
regulation, seeks to educate the public and investors on the risks and trading dynamics of the

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complex financial products traded in the market. The regulator notes that investors do not
understand how sophisticated financial products work, or the value of their risks, leading to them
being mis-sold; thus, the need to sensitize and assess potential investors for understanding of the
products before they invest. In addition, the regulator will fix weaknesses in the disclosure
frameworks that failed to protect investors incurring huge losses on sophisticated financial
products.
Conclusion
Markets are not perfect; and therefore, there is a need for governments and government
agencies to regulate or correct market failures when they exist. In Australia, ASIC is the body
that regulates capital markets. The role of ASIC is to safeguard the interests of the public and
potential investors by educating the stakeholders on financial products and enforcing regulation
to correct market anomaly. The role of ASIC can also be explained by theories of regulations.

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References
Belkaoui, A. R. (2004). Accounting theory. Ohio: Cengage Learning.
Posner, R. (1974). Theories of economic regulation. The Bell Journal of Economics and
Management Science, 5(2), pp. 335-358.
Stigler, G. J. (1971). Theory of economic regulation." Bell Journal of Economics and
Management Science, 2(Spring), pp. 3-21.