82564931 Accounting Theory

docx

School

Karatina University *

*We aren’t endorsed by this school

Course

BBM/002/11

Subject

Accounting

Date

Nov 24, 2024

Type

docx

Pages

Uploaded by BigFriendlyGiant5

Accounting Theory Questions 1 ACCOUNTING THEORY QUESTIONS Student’s Name Course Professor’s Name University City (State) Date

Accounting Theory Questions 2 Accounting Theory Questions Question 1 Among the different accounting theories, few have a more significant impact than the positive accounting theory. Wiratama and Asri (2020) note that the PAT’s philosophical objective predicts and explains any current accounting practices. PAT can be applied in the question to explain the response to any accounting standards that have been proposed. One explanation is that management concern about accounting policies can be influenced by the contracts the firm enters. In this case, the focus is the bonus theme and the bonus plan implemented in ABC Ltd. A bonus plan suggests that management compensation should be tied with the reported profits. According to PAT, such management executives are more likely to rely on accounting methods that increase the reported profits. The approach does have its detriments. Some executives may reevaluate assets upwards as a way of increasing the overall income. In general, bonus schemes influence accounting reporting in favor of the management. However, there is a risk associated with such schemes. PAT suggests that individuals always focus solely on their benefits. Therefore, managers are more willing to choose accounting practices that increase the profit even at the expense of other stakeholders. Such reports can increase the likelihood of a firm making bad decisions based on a report whose profits have been upward reported. At the extreme end, managers are willing to manipulate financial statements to receive compensation, especially considering the leeway that the GAAP gives firms in interpreting financial results. Question 2

Accounting Theory Questions 3 Managers are not the only ones who are affected. Boards of directors can decide to inflate the reported profits. PAT suggests that every stakeholder is looking after their interest. If the interest of the board of directors can be achieved by inflating reported profits, they are very likely to engage in the vice. Enron is a good example where the directors chose to underreport debt and over report revenue in specific critical segments of the firm to inflate profits (Eckhaus & Sheaffer, 2018, p. 304) . Under PAT, some of the reasons may include trying to achieve a bonus from the overall earnings. Another reason may be directors seeking reelection and choosing to inflate the earnings to increase their appeal to directors in the future. Picking an independent auditor can help reduce such issues, but sometimes boards collude with their preferred auditors to hide such crimes. Enron’s case is an excellent example of the collusion of the board and the auditors. Question 3 PAT suggests that people can engage in opportunistic behavior to serve their own best interest. The GAAP standards give a lot of freedom to managers in how they interpret their financial results. The management largely determines the accounting policies (Amiram, et al., 2018, p. 732) . Given the impact of reported financial information on board decision-making or shareholder opinions, management may be compelled to adjust the accounting standards to one that paints them in a favorable light. Common methods used include reporting revenue before services or goods are rendered or delaying record expenses in the current fiscal year to maintain a specific revenue. Management is opportunistic by first using the accounting freedom to manipulate the financial statements. Another reason that increases the opportunistic nature, as per the PAT, is the close relationship between the management and the independent accounting

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Accounting Theory Questions 4 firm that does the audit. Managers can underreport profits to exercise their stock options at a lower rate or report upwards when seeking performance-based bonuses.

Accounting Theory Questions 5 Reference List Amiram, D. et al., 2018. Financial reporting fraud and other forms of misconduct: a multidisciplinary review of the literature. Review of Accounting Studies, Volume 23, pp. 732-783. Eckhaus, E. & Sheaffer, Z., 2018. Managerial hubris detection: The case of Enron. Risk Management, Volume 20, pp. 304-325. Wiratama, R. & Asri, M., 2020. A Literature Review: Positive Accounting Theory (PAT). SSRN.