Question

15. What is Pareto optimality (sometimes called Pareto efficiency)? Why would adher- ence to it minimize accounting standard setting? 16. How do agency theory and the codificational viewpoint differ in assumptions about the behavior of individuals? 17. Why does codification presume a democratic setting? Rec

Answer 1

15. Pareto efficiency, or Pareto optimality, is an economic state where resources cannot be reallocated to make one individual better off without making at least one individual worse off. Pareto efficiency implies that resources are allocated in the most economically efficient manner, but does not imply equality or fairness. An economy is said to be in a Pareto optimum state when no economic changes can make one individual better off without making at least one other individual worse off. The problem with applying Pareto optimality to accounting standard setting is that each position of standards represents a unique Pareto optimal point. Any new standard or change in standards will adversely affect some individual or groups. This also includes preparers who must pay for the cost of preparing new standards or disclosures. 16. Under the agency theory view, individuals act in their own best interest. The problem with this assumption is that it is tautological. The codificational view is more process-oriented than agency theory. While individuals do operate in their own best interest, the standard setting process is a rational process and individuals involved with the regulatory process will more or less try to carry out the assigned tasks of the organization (which may well be in their own best interest). This does not, of course, guarantee optimal standards, but an evolutionary and rational process. 17 Codification, which is essentially a rational process with a diffusion of power, can only occur in a democratic society. The process is also evolutionary in nature. Codification is inconceivable in societies that are other than democratic