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ABC Ltd has incorporated a bonus plan that rewards the board of directors (executive members) by providing
a bonus of 3 per cent of reported profits. This is an Accounting-based incentive that has the advantage which
the accounting results may be based on subunit or divisional performance.
"A well-informed labour market will motivate management to work to maximise the value of its firm.
Underperformance might lead to dismissal and, if the labour market is efficient in disseminating data, a 'failed'
manager might have difficulty attracting a position with comparable pay elsewhere." (Deegan, 2020)
Requirement:
1) Using Positive Accounting Theory (PAT), discuss the bonus theme in general and why the bonus plan
(Accounting-based) was put in place in ABC Ltd?
2) Explain whether the board of directors could be motivated to try to inflate reported profits.
3) Use the opportunistic perspective of PAT to explain the potential for managers to manipulate
corporate disclosure.
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