Bath Accounting Taking a Bath Essay

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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.

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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 year before. In other words, rather than actually showing a profit or acting in a moral and economically sound fashion, taking a bath is making one's self look good by comparison with another bad actor, a straw man. In theory, a new CEO could be just as incompetent as the previous managers, but by 'taking a bath' during the first year of his or her operations, and then returning to generally accepted accounting practices in other years, he or she would seem to be doing far better than his or her predecessors. To minimize the negative agency consequences of 'taking a bath,' the company must clearly show how and why certain assets are being written off, to present a clearer picture of the company's financial situation to potential investors.

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"Bath Accounting Taking A Bath" (2009, June 15) Retrieved June 5, 2026, from
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