Accounting Theory and Policy Essay Example | Topics and Well Written Essays - 2250 words

accounting Theory and Policy - Essay ExampleGAAP and IFRS.The main reason for starting the debate was the serial of corporate s merchant shipdals in the U.S. where managers acted opportunistically to circumvent accounting rules to the detriment of investors, a result that accounting standards were supposed to foster in preventing. Standards were established to ensure that fiscal inform reflected the economic substance, not just the form, of transactions. However, auditors go outed different forms of reporting manipulation provided these were consistent with the interpretation of precise rules-based standards, allowing compliance with the form of financial reporting even as it failed to reflect the true economic substance of such transactions.Another reason for the debate is the move towards the need for lap because of the number of accounting standards currently in force, which creates problems related to time eminencess, compliance, comparability, and consistency. Accountants find rules-based (also called cookbook or checklist) standards too exact and time-consuming, causing delays in reporting, and unable to meet the challenges of a complex and fast-changing financial world. Rather than help accountants serve professional judgment and objectivity, having too many rules provide specific benchmarks that makes it easy for auditors to fulfil compliance in form precisely not in substance. Therefore, since principles are more general than detailed rules, FASB is of the opinion that create principles-based standards would make convergence easier and, at the same time, allow auditors to minimise the tendency of managers to engage in manipulations of inform financial results.Rules-based accounting standards-setting in the U.S. resulted from years of consultations regarding increasingly complex financial transactions. Companies and auditors asked for bright line rules, so-called because they contained precise numerical cut-off points supposedly to guide tra nsactions reporting. However, as the example of accounting for capital leases showed, companies form a way to use professional expertise, creative arrangements, and over-liberal judgment to circumvent the rules contained in a 450-page FASB chronicle to clarify the topic.Why do companies restructure transactions even in the face of bright line rules The main reason is that managing mesh can be beneficial for managers. Managers have incentives to look after their bear best interests, leading them to manipulate transactions if the benefits outweigh the costs such as taxes, penalties from SEC enforcement, and ease sheet reclassifications. Minimising costs would maximise profits and, in most cases, benefits to managers. Auditors also have incentives to earn as much revenues from their services, which may be affected by reporting manipulation, so they sometimes allow debt to be classified as equity (some auditing fees depend on company asset size). By maximising profits, earnings man ipulation also allows managers to keep their jobs, avoid shareholder lawsuits, and raise the share price so they can exercise stock options and earn higher salaries.Evidence shows that managers are more likely to manipulate financial reporting if there are precise (rules-based) accounting standards than when standards are flexible, and that auditors are more likely to allow this as long as the rules allow it. When there are no bright line rules, but only concepts-based standards, managers are less likely to engage in costly