Accounting question answer Essay Example
Discuss whether the themes in this article would predict, or not predict, accounting standards which promote or facilitate OBF and earnings management.
I think the themes explained in the article clearly predicts the accounting standards which promote OBF and earnings management. They outline why companies use strategies which are meant to manipulate the firm’s earnings in order to match the initially targeted figures. They also show the essence of income smoothing which is one of the reasons for developing accounting standards which promote either OBF or earnings management.
Besides, the themes outline the motivations behind making accounting standards which facilitate both OBF and earnings management. One of the motivations which comes out in the themes is contractual motivation. We understand from studying the article that some accounting standards promote OBF or earnings management to enable managers to avoid violating the terms of their contract. The managers may influence accounting standards to facilitate OBF and also earnings management in order to gain the flexibility of choosing policies which may prevent proximity thus avoiding the contractual violation.
The themes also explain political motivation as another thing which predicts setting of accounting standards. We understand from the themes that firms especially the ones which are politically visible may advocate for accounting standards which will promote earnings management thus reducing their net income in order to lower their profitability.
This article also explains taxation as another factor which may determine accounting factors are making it suitable to efficiently predict accounting standards which promote OBF and also earnings market. Taxation facilitates the use of both OBF and earnings management since they lower the calculated taxes thus allowing more investors which are a positive thing to the securities market. (250 words)
Watts, R.L.,and Zimmerman, J.L., 1979. The demand for and supply of accounting theories: the market for excuses. Accounting Review, pp.273-305.
Watts, R.L., and Zimmerman, J.L., 1990. Positive accounting theory: a ten-year perspective. Accounting review, pp.131-156.
Discuss how these variables may shape accounting rules, especially about off-balance sheet financing and earnings management.
There are numerous ways by which the variables highlighted by MR Herz may shape the accounting rules. One variable highlighted is the political influence which means conflicting perspectives and even agendas when reporting. Political influence affects the outcome of the reporting process outlined in the accounting rules in order to increase the firm’s economic value. Also, it shapes the accounting rules in ways which promote self-interest purposes which are not consistent with the legal accounting rules.
Under this variable, political influence happens when the principal aim is to shift the standards-setters’ position from what is right as given in the accounting rules especially when it comes to off-balance sheet financing and earning management. Instead of these variables being consistent with the accounting rules, they shape the accounting rules in a way that lower transparency. The variables shape the accounting rules in ways which improve financial reporting for companies for their altruistic reasons.
Companies, especially those who are politically visible alter the accounting rules to gain their self-interests and also reduce expenses such as auditing costs. They also lobby the rules which may require more auditing work. Powerful entities are capable of shaping the accounting rules in their favor. They influence the legal ways of the standard-setting process. The key actors influencing the accounting rules in IASB are the standard-setters, regulators and even other accounting firms in the industry and profession. They significantly shape the standards and rules which are attributable to the resources they have. This negatively shapes the accounting rules especially during strategic times thus leading to slower economic development. (250 words)
Becker, C.L., DeFond, M.L., Jiambalvo, J. and Subramanyam, K.R., 1998. The effect of audit quality on earnings management. Contemporary accounting research, 15(1), pp.1-24.
Biddle, G.C., Hilary, G. and Verdi, R.S., 2009. How does financial reporting quality relate to investment efficiency?.Journal of Accounting and Economics, 48(2), pp.112-131.
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