Question

One of the differences between Managerial Accounting and Financial Accounting is reporting flexibility. Financial reporting is restricted by Generally Accepted Accounting Principles whereas reporting in Managerial Accounting has fewer rules.

Why is it permissible to violate Generally Accepted Accounting Principles when preparing reports used strictly by company management? Should external users always have the same information as internal users?

Answer 1

ANSWER:-

The rationale is explained in the longstanding discussion and even disagreement if generally accepted accounting principles (GAAP) should be applied to private companies.

"The AICPA task force concluded that most of the constituencies in the 2004 study are of the opinion that it would be useful if the underlying accounting for public versus nonpublic (private) companies were different in certain situations. It found that some of the GAAP requirements for public companies studied lack relevance/decision usefulness for private companies. In addition, the task force found that, although respondents rated certain GAAP requirements as low on decision/relevance usefulness, respondents appear to believe that the benefits of complying with GAAP outweigh the costs. This apparent conflict may be explained by the favorable ratings given the overall value of GAAP.
The task force also concluded that allowing GAAP exceptions and other bases of accounting is not an appropriate response to the unique needs of private-company financial reporting. The task force believes that such an approach would erode the overall recognized value of GAAP, while other bases of accounting may not adequately serve the needs of private companies."
So, the GAAP requirements are seen (by some) as not relevant or useful and perhaps may not be worth the time and expense needed to comply.
There is a similar discussion even for private companies that are required to use GAAP.

"The final guidance – Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies – is intended to assist the FASB and the PCC in determining whether and in what circumstances it is appropriate to adjust financial reporting requirements for private companies following US Generally Accepted Accounting Principles (GAAP).
The FASB and the PCC will use the decision-making framework – along with the existing FASB conceptual framework for financial reporting – in making user-relevance and cost-benefit evaluations for private companies."
So, not only are there issues of relevance to the user and cost versus benefit the reason for many private companies to not be required to use GAAP; but these are also issues for those private companies that do need to use GAAP.
Perhaps the issue is better framed as requiring public companies and private companies in certain businesses or activities as being required to adhere to the stricter, or higher standards, of GAAP than to phrase it as a violation of GAAP principles (to which most private companies are not required to meet).
For a public company that is required to otherwise use GAAP, for reports only used by company management it is also not relevant, not useful or not worth the cost versus the benefit. The rationale is the same as allowing private companies not to adhere to GAAP to allow management to produce reports that do not adhere to GAAP.
Of course a company may choose to make all of their reports GAAP compliant even when not required; but the additional cost and effort to do so might or might not be in the best interest of shareholders.