Whether Accounting Standard Setters Should Continue to Grant Discretion and Flexibility to Companies in Making Accounting Choices.

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People have been shocked by the facts that creative accounting has becoming a very common practice among companies all over the world, these companies including some the world largest companies like Enron. “Creative accounting may be defined as the process of manipulating accounting figures by taking advantage of the loopholes in accounting rules and the choices of measurement and disclosure practices to transform financial statements from what they should be, to what preparers would prefer to see” (Naser, 1993, p. 59). As a consequence, it has put a lot of pressure to accounting standard setters. However, they should continue to grant discretion and flexibility to companies. Next I will explain some reasons for it. Firstly, one of the motivations for creative accounting is because that accounting rules allow a company to choose between different accounting methods. However, Accounting will always involve choices as there are many different types of business across different types of industries. For example, you may not perfectly compare a manufacturing company with a service company. Also, a manufacturing firm’s fixed asset is based on physical asset however a software firm would have a large portion of intangible assets. Therefore, the same judgment and standards cannot represent the true meaning of contain company’s accounts on all situations, especially for firms which have unique characteristics. Therefore, the standard setter’s intention for granting discretion and flexibility could be beneficial for investors if it can be supported by accountant’s ethical behavior. Secondly, permission for accountants to choice different accounting method and giving different discretions is not the only cause of incentives for creative accounting. For example, artificial transactions can also give opportunities for creative accounting. Unethical practitioners can enter artificial transactions into the financial statements (Fox, 1997). With this technique, financial...
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