They are acting as agents of the company, and have a duty to improve company performance. Theoretically, 'taking a bath' can even buy a good company time, prevent a financial panic during a particularly bad year, and give the company time to reconfigure itself. But ultimately, boosting the value of a company is 'good' only if the accountant's primary responsibility is to shareholders and other individuals with short-term interests in the company.
In contrast, from a normative ethical standpoint, this practice of 'taking a big bath' creates an inaccurate portrait of the company's real economic status, and can hurt individual investors and employees over the long-term. The company's poor performance will eventually be revealed, innocent people will invest in a company that is structurally unsound, and employees will have to be let go when the full extent of the company's failure is revealed to the world.
Question 3: How can the agency costs of this practice be minimized?
The principles behind "taking a bath" are fairly easy to understand. It is the accounting equivalent of pointing to one's younger sibling and saying 'he did it,' or pointing out that 'my brother' did something even worse the...
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