Question

Provide a short response that is for or against the following statements:

Accounting is an exact science. Managers choose accounting procedures that produce the most accurate financial picture U.S. accounting standards are influenced more by politics than economics. If FASB and SEC did not require financial disclosures, most companies would provide little to outsiders. Managers manipulate good and bad news about the company

Answer 1

For Statement 1:-
Accounting is not exact science but it is art as well as science.
Accounting can be considered an art because it requires creative judgment and skills. In order to perform accounting functions well, discipline and training is required. Accounting can also be considered a science because it is a body of knowledge, but since the rules and principles are constantly changing and improving, it is not considered an exact science. The American Institute of Certified Public Accountants (AICPA) defines accounting as: "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character, and interpreting the results thereof".

For statement 2-
Yes!! Managers need financial accounting information to help them carry out their responsibilities to shareholders. Financial accounting information is used by managers to assess the profitability and health of individual business units and the company as a whole. Their compensation often depends on financial statement numbers like earnings per share, return on equity, return on capital employed, sales growth, and so on. Managers often use a competitor’s financial statements to benchmark profit performance, cost structures, financial health, capabilities, and strategies.

For Statement 3-
As a social science, accounting is affected by the environment in which it operates, but at the same time, it is one of the factors impacting on this same environment. This is a fact that points to the interdependency of accounting and its environment. A country’s accounting system is affected by a variety of historical, economic, socio – cultural, institutional, and other non – accounting factors, so it is highly unlikely for the influential factors of any two countries to be exactly the same. Therefore, it can be logically assumed that the factors affecting the development of a country’s accounting system are also the generators of special national traits and, thus, the generators of differences between accounting systems at the international level. After all, just as countries have different histories and political and legal order or even value systems, so will their accounting systems have more or less differing development and operating model.

For statement 4-
Although the Securities and Exchange Commission (SEC) has ultimate legal authority to determine accounting principles in the United States, it has looked to private-sector organizations to establish these principles. Today, the private sector standards setting organization is the FASB. It exists as an independent group with seven full-time members and a large staff. Board members are appointed for five-year terms and are required to sever all ties with the companies and institutions they served prior to joining the board.

The FASB follows a "due process" procedure in developing accounting standards and updates that involves three steps:
(1) Discussion-memorandum
stage; (2) Exposure-draft stage; and (3) Voting stage. Public comments on discussion memoranda and exposure drafts are invited, and public hearings are sometimes held.
So it is true to say that if FASB & SEC didn't require financial disclosures, most companies would provide little disclosures to outsiders.

For statement 5-
Yes, managers manipulate good and bad news about the company.Earnings Management refers to accounting practices used by the management of a company to deliberately manipulate the company's earnings to smooth income over several accounting periods and/or to meet other pre-determined targets.

As the application of Revenue Recognition rules under IAS/IFRS and U.S. GAAP in specific settings still leaves room for considerable latitude and judgment by management (e.g. determining when revenue has been earned and is realizable), managers can sometimes exploit the flexibility in the accounting standards to manipulate Reported Earnings in ways that mask the underlying performance of the companies.

Some typical forms of earnings management are the following:

Inaccurate revenue recognition.Unsuitable accruals and estimates of liabilities.Excessive provisions and generous reserve accounting.Intentional minor breaches of financial reporting requirements that aggregate to a material breach.

Although Earnings Management is not new, it has become increasingly common in today's marketplace due to pressure to meet analysts' earnings forecasts. Some managers have even resorted to outright financial fraud (e.g. Enron, Global Crossing, WorldCom), which led former SEC (Security and Exchange Commission) Chairman Arthur Levitt to warn that "the motivation to meet Wall Street earnings expectations may be overriding common sense business practices. (...) As a result, I fear that we are witnessing an erosion in the quality of earnings, and therefore, the quality of financial reporting".