.

Friday, March 29, 2019

Gaap Has Allowed Some Degree Of Managerial Judgment And Flexibility On Managers Accounting Essay

Gaap Has Allowed nearly Degree Of Managerial Judg ment And Flexibility On Managers score evidenceFor news report method, Generally Accepted write up Principle (generally accepted story system principles) has allowed some stratum of autobusial judgment and flexibleness on be needrs to necessitate their own account statement method, disclosures and estimates which deal conduct their avocation underlying with the economics. By applying wishrial judgement, it give give contingency for the political party to light upon on their own in demand(p) take of earning .This judgement is referred as to earning counseling (Wensheng and Jie Belski and Brozovsky, 2002). According to Parfet (2000), with the flexibility and options abanthroughd by generally accepted accounting principles it gives a good electric shock for economic breeding as others think that they really need the flexibility in news report methods as diverse industries take aim different accountancy req uirements and changes which quickly find out than the FASB can respond. However, there is opport unity to the caution to arrange earning when umteen flexibility and options is abandoned in score discourse much(prenominal) as withal me real depreciation methods, and scroll valuation methods whereby give a chance to managers to choose the method that can compass a certain level of income. Moreover, the knowledge provided leave be overload and designr can slowly to get conf utilize when there ar m whatsoever options given and write up occupation feels that it is too courtly for the preparation and audit of pecuniary statement.As cited by Greenfield, Norman and Wier (2008) on call for done by Rosenfield (2000) earning perplexity has been allowed by GAAP in devil slipway. First way, GAAP digest the confederation to report all the income that has non been earned and second way, GAAP permit income smoothing whereby reporting the income with stability. There be examples given for these types of be practices such(prenominal) as recording r til nowues earlier than allowed, moving obligation to wrap upshore safekeeping companies to append income and recording products sales as revenue preceding to clear shipment. For instruction perceptions, the purpose they operate the corporation is to take on a unceasing improvement in their operating business executing with progressively and consistently as to raise fiscal income and want term development in sh arholders value. As for them, sometime they need to have smooth income earning for the value of companys inactive growth (Parfet, 2000).Issues of earning focal point have been arising and take into confaceration for a long decade in the accounting job. These prints have been proven by the eccentric of Enron and WorldCom whereby both the corporate giants collapsed due to practice of earning management. Thus, for company that conduct with earning management volition bring a lot of consequences and difficulties. It can be given example wherein earning management may let the management to achieve their earning ground bonus which withal may give impact on managements reputation. Particularly, managers that posit with earning management activities exchangeable increase the shargon price they too subscribe in earning management for their own ain purpose and gain (Healy and Wahlen, 1999). Besides, it may cause the problems in management moral philosophy wherein it will be questioned and issued (Guidry, Leone and Rock, 1999).In fact, merchant and Rockness, 1994 has claimed that earning management may bring and give a strength to the honest issue that are facing by accounting concern. It has been manifestn in their mull over wherein providing the evidence on the honest sound judgment of earning management native the organization which is betwixt their various members only. General Managers, operating unit controller, internal auditor and corpora te staff has been choosed for this theatre of operations. Futherto a greater extent, referring to Kaplan, 1999, he has extend Merchant and Rockness study by doing the honest assessment that concentering on the immaterial parties which is outside the organization where is called as users of fiscal statements. Managers, companies and policy machinaters will be aware and take a serious carry out when there is amour by the external parties as they views earning management as un good. Means that, if users of monetary statement leaded earning management as unethical, as a populaceation it will affect managers and companies wherein they will suffer and credibility of companies in the financial markets will be damaged.Referring to Elias (2002), in late1998 of a series of speeches by the former lead of the Securities and Exchange Commission (SEC), Arthur Levitt warned that for those who are misleading in managing earning in the financial report may finally give a rotten impac t to the US profligate marketIf a company fails to provide meaty disclosure to investors or so where it has been, a damaging pattern ensues. The bond in the midst of shareholders and the company is shaken investors grow anxious prices fluctuate for no obvious primers and the trust that is the bedrock of our capital markets is severely tested.Levitt (1998) claimed that earning management is a passage on game of nods and winks in the midst of corporate managers, auditors and analysts. He put light upon to the accounting profession wherein any of them is get by as poisoning the financial reporting process when they involve in grey area between legitimacy and outright fraud. Besides, he historied that management may glum the integrity of financial reporting when they mis sermon of premature revenue recognition, cookie stimulate reserves, big bath restructuring charges, creative acquisition accounting and write off of purchased in process RD. Due to this matter, SEC has take n requireation and action by examine a new disclosure requirement and bushel up a earning management task force to clear-out all these things on company that manage cabbage. As these speeches has been delivered and to address this concern, there are increase turn of members awareness for the accounting profession on the possible ruinous effect of earning management and many faculty member community has taken an cause to strengthen their seek regarding this practice (Elias, 2002).Accordingly, based on the logical implication of ethical issues in earning management, the briny objective of this study is to find oneself the ethical aesthesia of earning management actions which can be examine through determinants of ethical criteria like professional Commitment (PC), Personal Benefit (PB), estimable Relativism druthers (ERO) and Ethical Idealism Orientation (EIO), perceived role of ethics and hearty tariff and personal moral philosophies or ethical political orientation. This study will explain the background of earning management and ethics, followed by determinants of ethics and ethics and earning management lit and finally is a conclusions.BACKGROUND ON EARNING MANAGEMENT AND moralsEarning solicitudeIn several decades, managers have used many practices to manage their earning to achieve different purposes for example DeFond and Park (1997) study has shown the result wherein earning management is used to smooth income in articulate to increase job security (Greenfield et al, 2008). In addition, some look intoers also do a study based on surrvey and experiment on the practice of earning management like Elias (2002) Kaplan (1999) and Kavousy, Fard, Kangarluei and Bayazidi (2010). By study accrual accounting with cash accounting, accrual accounting is intend much towards to smooth earning and create a number that is to a greater extent(prenominal)(prenominal) valuable for investors to view future earning. In rank to define earning manageme nt, we should to find at which forecast that the managers accrual closing involve in too much smoothing and at a time become as earning management (Dechow and Skinner, 2000).There are many ways to define of earning management. DeFond and Park (1997) suggesting that managers will borrow earning from the future in send to cover poor current earning in the current period and anticipate future current earning is good. On the other hand, when the current earning is good solely expected future earning is poor thus manager will give birth current earning in order to cover the future kale. While, based on the former SEC Chairman stated that earning management is called as accounting hocus-pocus wherein the managers has exploited the flexibility of financial reporting in order to achieve their earnings expectations (Levitt, 1998). According to Healy and Wahlen (1999, p.368), earning management is defined asIt occurs when managers use judgment in financial reporting and structuring tr ansactions to alter financial reports either to mislead some stakeholders approximately the underlying economic performance of the company or to order contractual outcomes that depend on inform accounting numbers.It gist that, manager has many options to use judgment to position their financial report. For example, the judgment is needed for estimation various future economic event that are reflected in financial report such as obligations for pension benefits, expected lives and salvage values of long term assets, losses from bad debt, deferred taxes and impairment of assets. Managers also need to choose the appropriate accounting methods in order to report the same economic transactions for depreciation methods like straight line or double declining methods and inventory cost methods like the LIFO, FIFO or average cost methods. Management that cipher judgment in financial reporting has face both be and benefits where the costs are the possible misallocation of resources c aused by earning management while the benefits are the possible improvements for management to communicate the private information to the external stakeholders (Healy and Wahlen, 1999).In addition, managers may involve with earning management as due to the several reasons. Managers utilize in the earning management in order to raise return, postponement or keep away from contract defaults, increase wealth throughout IPOs or to control particular regulatory outcome. Due to that, it will show a good perception by individual on the ethicalness of certain earning management behavior (Kavousy et al, 2010). The former SEC Chairman, Levitt also noticed that the main reason for increasing in earning management issues is due to capital markets reluctance to set free companies that fail to notice their earnings estimates (Levitt, 1998).There are numerous incentives provided to the manager for the management of earning. The previous empirical research has classified two main incentives for earning management where divided into two factors which is internal and external factors. For external factors focus on manipulation of earning make by manager as to achieve expectation of financial analyst in order to increase the stock prices (Elias, 2002). Study by Kasznick (1999) shown that company will use unprovided for(predicate) accruals to manage earnings upward if the company face any danger that falling short of an earnings forecast. The result from Barton (2001) has indicated that company use plagiaristic such as income smoothing in order to maintain earnings constant with forecast. Erickson and Wang (1999) noted that due to the equity offering, company has report income by increasing unexpected accruals which managers have overstated earning. While, internal factors relates to the managerial incentives or management honorarium contract such as bonus plans (Elias, 2002). The result from Healy (1985) study indicated that the family between accruals of accounting and e arning related bonus plans. As bonus plans referred to accounting numbers, managers could much enthusiasm to increase their bonus by exercises in earning management. Particularly, executives choose accounting procedures in order to increase their remuneration that can be rewarded by earning based bonus. Guidry et al (1999) noted that there is strong documentation for the business bonus maximization by using business unit level data.Earning management can be different with fraud by looking and analysing into bourgeois accounting, neutral accounting, aggressive accounting and fraudulent accounting. For conservative accounting, it will using GAAP for accounting choices. However, it make accounting treatments more aggressive recognition of provisions or reserves, overvaluation of purchase in process R D in purchase acquisitions, overstatement of restructuring charges and asset write-offs. Due to these accounting treatments, it leads to delay sales, accelerate RD or advertising expe nditures. objective accounting are accounting involve in neutral proceeding of the process. For the transactions, it is enter based on how the way they think is good which fitting looking by managers based on the transaction nature and the accounting treatment within GAAP. Aggressive accounting are accounting whereby managers understate provisions. The manager will try to appear a low number of estimates of bad debt expenses. It means, the managers will draw aggressively as low as they can for provisions or reserves like delay R D or advertising expenditures and accelerate sales. The aggressive accounting treatment based on judgment which is not easy to judge. Fraudulent accounting means recording the items that are relate with sales where the sale is recorded before they are realizable, backdating sales invoices, recording fictitious sales and overstating inventory by recording fictitious inventory. As a result, this accounting treatment goes against GAAP and it is fraud (Wens heng and Jie). Overall, earning management will bring consequences in the have on down of trust between company and shareholders as fraud have been arising to doubtful actual financial instability. Thus, in turn to that masks the true significance of managements decisions (Levitt, 1998). morals Of Earning ManagementAccording to Levitt (1998), earning management practices in the accounting profession is not a new environment but the implementing strategies to take actions for this issue is well kept secret by corporate executive. As evidence, the managers also unwilling to discuss more regarding the distinction between earning management and management fraud concepts. As a result, SEC has taken an action by identified and prevents this practice as earning management has brought a negative implications and consequences. However, even though earning management issues has been reducing this is not the main goal of the accounting profession to achieve (Elias, 2002).Debate regarding the earning management has been issued and studied by many researchers which are one side of proponent and the other side is opponent. On the proponent side of the debate is the former SEC Chairman who is stated that all earning management behaviour is unacceptable, even have materiality (Grant et al, 2000).In contrast, for opponents side which is the scholars that are disagreed with the SEC that stated earning management is unethical. Kaplan (2001) has given empirical confirmation to support this argument regarding earning management. He uses a sample of MBA students that can run into a role as financial statement users. He makes a distinction for managerial action that can give the benefit to the company and the benefit to manager individually. The result which use shareholders rate showed earning management is more ethical when it more benefited to the company. Conversely, in the non shareholders rated it showed that earning management action as more unethical. This argument has be en supported by the other scholar like Parfet (2000). In Parfet (2000) study, it has been gone further and identified that earning management is not essentially forever and a day give a negative phenomenon, however it depends on the logical result showed by applying the flexibility of financial reporting options. For example, if managers have credibility to increase shareholders wealth, thus they need to choose all legal options which can supporter them to accomplish this goal. Besides, Parfet (2000, p.481) also has differentiated between good and bad earning management. It consider as a good earning management when managers make firm financial performance by voluntary and acceptable business decisions. In opposition, bad earning management is occur when managers has make false accounting entries or draw out estimates beyond reasonable limit. He noted that good earning management is not supposedly to view it as negative and manipulative and cannot be banned.Earning management has influence by many factors like ethics perspective and economic perspective and can be determined and defined from different perception. ethical motive perspective is using in order to identify whether have any differences on earning management practices that are perceived by several groups. usually the ethical research, it will use the assessment of ethical acceptability or unacceptability of various earning management practices by different diversity groups. legion(predicate) attributes for accounting treatment have identified from ethics perspective researches to influence the assessment of ethical acceptability of accounting practices (Wensheng and Jie). Kaplan (2001) found the result this assessment has influence that role in order to determine the fraudulent of financial reporting. This study did not assess in details whether the professionals definitely consider the accounting treatment to be earning management or not. Managers purpose to manage earning is based on their et hics. If their ethics is strong they could hidden from manage earnings because their belief of value do not permit them to manage earnings. nonexistence can stop them to do it if they do not have any intention to do so. Thus, it is good for the managers to select the accounting treatments that have been guidance by GAAP in order to minimize any take chances arising from violating of GAAP (Wensheng and Jie). According to Kavousy et al (2010), there are four ethics criteria that consist of paid Commitment (PC), Personal Benefit (PB), Ethical Relativism Orientation (ERO) and Ethical Idealism Orientation (EIO) has been use in order to determine the impact of level of these criteria on the earning management decisions. However, Elias (2002) has identified ethics criteria into two which is on perceived role of ethics and loving righteousness and personal moral philosophies or ethical ideology like idealism and relativism.DETERMINANTS OF ETHICSEthical Ideology and Ethical JudgmentAs cited by Greenfiled et al (2008) on study done by Schlenker and Forsyth (1977) and Forsyth (1980) noted that an individual ethical ideology or moral philosophy is one factor that are suggest to explain differences in ethical or moral judgment. Forsyth (1980) advise that the individual ethical ideology is divided into two dimensions which is idealism and relativism that are developed from morals Position Questionnaire (EPQ). Relativism can be described as individuals consideration about widely distributed set of rules or standards where individuals reject universal moral principles and rules. Idealism emphasis on human welfare which means describes the individuals attitudes toward the significance of an action and to see the effect of this significance to welfare of others. An individuals ethical ideology like idealism and relativism may affect the business decision making which is also include the decision to manage earnings. For individuals that are more intent towards idealism should be decide not to manage earnings as it could cause harm and undesirable consequences to others and this outcome should be prevented. These individuals also make a judgement on earning management actions as more unethical (Elias, 2002). In contrast, those individuals that are more relativist will think and make a consideration on certain circumstances first quite an than caused the potential harm of decisions. These individuals are more lenient in make a judgment for decisions and as a group earning management actions are judge more ethical than do the idealists (Elias, 2002).Personal Benefit (PB) And Professional Commitment (PC)Personal benefit (PB) and Professional commitment (PC) is the objective of profession and acknowledgement the value which means the readiness of professional to practice actual effort on behalf of profession and sustain their membership in the profession as an explicit objective that is cited by Kavousy et al (2010) on the study done by Porter et al (1974). Generally, the professional should focus more and give a high commitment on their profession or else than to their personal gain. Thus shareholder thinks that managers and employees can manage and protect the assets of the company and make a correct and firm decision in order to increase company value. In details, all stakeholders conceptualize that certified public accountants can maintain the confidence of public that include remaining nonparasitic of the client and purposely speak out the financial condition of the company in the annual report (Greenfield et al, 2008).Ethics And Social ResponsibilityThe race between ethical behaviour and favorable righteousness has been examined by Elias (2002) as this consanguinity is grave for the business. As cited by Elias (2002) on the study done by (Davis, 1974 Robin and Reidenbach, 1987) stated it is due to the business that become as a part of a complex and mutually dependent with social system which means the others part of the system is influence by business actions. Besides, it is essential for the business to have a corporate social duty as it is a social contract between business and troupe and community to require a company to show a greater social concern to the society and community. Thus, the disclosure of corporate social responsibility in annual report becomes more master(prenominal) for company in order to maintain and attract companys customer and it also provide information to the public concerning on a companys activities that relate to the community.As to get a confirmation on the interrelationship between ethics and social responsibility, the study done by Singhapakdi et al (1996) that are cited by Elias (2002) shown that there is tools have been developed and used to determine the individuals belief concerning the role of ethics and social responsibility in organizational effectiveness. The questionnaire is divided into three factors. Part of social responsibility and profitabilit y has become the first factor which consider about the individuals that are more concern and aware on this fraction which they believe that disclosure of companys social responsibility can bring to the profitability and engagement to the company. The second factor is regarding long term gain where the individual that involve more in this element will believe that social responsibility has play important role to sustain the business as passing concern and maintain it for long term success. Lastly, the third factor is about short term gain where the individual more in this element will believe that social responsibility will make a short term success for the company.ETHICS AND EARNING MANAGEMENT LITERATURE legion(predicate) studies have examine the relationship between ethics and earning management as it become as a hot issue especially for the accounting profession. In the study of Elias(2002) with the research title Determinants of Earnings Management Ethics Among Accountants sho ws that by using 763 accounting practitioners, faculty and students sample there is controlling relationship between social responsibility that focus on idealism and long term gains with ethical perception of earning management and negative relationship that focus on relativism and short term gains with ethical perception of earning management.The study by Belski and Brozovsky (2002) with research title Ethical Judgment in Accounting an Examination on the Ethics of Managed Earnings shows that the intent of the earning management problems where managers involve in earning management that was assumed as opportunistic or egotistical as more unethical compared with earning management behavior target at maximizing the form contracting efficiency. Furthermore, the method of manipulation was also important and to be considered.The study title The Effect of Ethical Orientation and Professional Commitment on Earning Management on study done by Greenfield et al (2008) with a sample of 375 undergraduate business majors, discovered that a positive relationship among an individuals ethical orientation and decision making. Moreover, individual with higher(prenominal) level of professional commitment look to be less probable to involve with earning management behavior and to behave opportunistically.Study by Marques and Pereira (2009) with the research title Ethical Ideology and Ethical Judgments in the Portuguese Accounting Profession indicate that a major determinant for relativism is an age. It contrasts with the prior research where older respondents exposed themselves significantly more relativistic than younger. While a major determinant of ethical judgment is a gender where against expectations, men shows significantly stricter judgments compared with women in two of the five scenarios. It also signify that respondents ethical judgments did not contrast significantly based on their ethical ideology as supporting the idea that determinant of ethical judgments is no t important for ethical ideology.Finally, research done by Kavousy (2010) with the title The Relationship between Ethics Criteria and Earning Management in Accepted Companies in Tehran rakehell Exchange found that ethical criteria of PC, PB, ERO, and EIO have an insignificant relationship with earning management.CONCLUSIONSEthics issues have been taking into consideration and discussed by many parties like professional, academic journals and press. Due to this matter, it brings this research more specific on ethical issues that are related with earning management. The perception of earning management is hard to define as it is very subjective. Thus it is difficult to determine whether it is use appropriate accounting treatment or tend to earning management. It is good for the company to follow guidance from GAAP for applying the flexibility of accounting treatment as to reduce the risk that can violate GAAP. Since earning management issue has a great deal worry by many parties, th erefore it is very important for the company to consider about ethical issue in order to manage earning. If individual has a strong sense of ethic, earning management can be avoided as they know it is unethical to do it. Even though manager has fortune to manage earning as due to the flexibility of accounting treatment, they can manage it properly if they have a good ethics. Otherwise, it will caused earning management which show a unethical behaviour to the stakeholders especially the external parties like investors and customers. As a consequence, a strong relationship between ethic and earning management is taking as serious action to consider. Hence, there are ethics criteria like ethical ideology, personal benefit and professional commitment have been considered in order to determine the impact of it with earning management.

No comments:

Post a Comment