The focus of Positive Accounting Theory (PAT) is to forecast a firm's actions concerned with accounting policy choices and the response of the

firm towards proposed new accounting standards. PAT adduce the

importance of accounting policy to management is related to the contracts

entered into by the firm

a) The political process in the article consists of the review of the rules and

regulation that govern the operations of the industry, such as the method

promotion of prescription drugs through educational events, based on

proposals by members of the public and input from consumer

organizations that are focused on protecting the end users of the

prescription drugs

b) According to the article, the maximum fines for companies that brake the

rules is expected to increase from $200,000 to $250,000, however the

consumer organization calls for a maximum fine of $1.1 million

Based on the expected increase of $50,000, the impact on small firms will

much more than impact of the fines on large companies in the

pharmaceutical industry that can afford such fines thereby promoting the

large firms to introduce more new prescription drugs that increases

revenue and market share

The increased fines will alter the accounting information of the firms which

can lead to more generalized expenses in order to avoid fines rather than

increased details. Therefore, expenses on advertisement may increase

alongside increase in revenue

c) (i) The proposed increase in fines from $200,000 to $250,000 will

further reduce the earnings of defaulting firms. However, the increased

revenue and market share that comes after promoting prescription drugs

at events can be easily made to offset the fine costs by increasing the

price of the drugs

(ii) The increase in fines indicates the level of effectiveness of the previous

fines was less than expected, therefore, the increase fines will not impact

the management compensation contract of firms that follow the rules, but

may increase incentives in other firms