Accounting for false objectivity

Topics: Generally Accepted Accounting Principles, Balance sheet, Financial statements Pages: 12 (5210 words) Published: November 3, 2014
Journal of Finance, Accounting and Management, 2(2), 1-11, July 2011 1 Accounting for False Objectivity
Ralph Palliam
American University of Kuwait, Kuwait

Corporate scandals and misleading financial statement reporting have raised serious concerns surrounding standards in all forms of governance and have given one an opportunity to discredit capitalism as an economic system. An element of distrust pervades every line of worthwhile endeavor. Stockholders, bondholders and other stakeholders who include employees, suppliers and consumers are continually pre-occupied in determining the worthiness of financial reports. Elements of distrust have come to pervade modern commerce and corporations and economies have yet to recover from the stigma of deceit. The credibility of accounting standards together with its professional ethics is being consistently questioned. The collapse of major corporations and economies reveals the extent to which the accounting profession was actively involved in manipulating financial results and financial positions within the confines of generally accepted accounting practices and ethical standards established by professional boards. Performance and progress statements that do not accurately capture the reality of an entity affect numerous stakeholders. Financial institutions in particular get to misallocate scarce financial resources and such conduct has devastating consequences. Moreover, when long serving and committed company employees are duped into providing their skills to entities that have a limited future, the moral fiber of corporations and society comes in question. Whilst objectivity is the aim of those who manage a corporation, there are some who stand to gain from cooperating with management to falsify the accounting system to produce a misleading, distorted, and downright fictional portrayal of a business’s health and prospects. How accounting is used by management to compromise objectivity is the subject of this paper.

Keywords: Accounting, earnings manipulation, earnings management INTRODUCTION
As one encounters quantum mechanics and real life, one soon realizes that there are shades of grey and moral dilemmas and objects are not always as they may seem. The failures of major corporations left many questioning whether the collapse and ultimate bankruptcies was solely as a result of the product of bad business praxis or the consequence of criminal conduct. In their seminal work, The phenomenology of earnings management within the confines of Agency Theory, Palliam and Shalhoub (2003) capture eloquently the extent to which earnings management and manipulation are prevalent in major corporations. When any two numbers put together could equal to whatever the agenda happens to require would certainly make creative financial officers with questionable financial practices that would erode the investor confidence in the financial markets. Consequently, reports of corporations manipulating their financial statements have been widely noted. Beneish (1999) in his study: The detection of earnings manipulation contends that the extent to which earnings are manipulated has long been a

Journal of Finance, Accounting and Management, 2(2), 1-11, July 2011 2 question of interest to analysts, regulators, researchers, and other investment professionals. Despite recent commitments by the regulators and particularly the accounting profession to instill moral and ethical codes of conduct in its membership in their reporting practices, earnings manipulation has been given scant attention. In this regard Partnoy (2003) argues that the nature and characteristic of manipulation of accounting information is complex and extremely difficult to determine, and Jennings (2006) concludes that there is a need for more moral training and leadership to motivate professionals (accountants) to act in the public’s best interest, not only for the sake of the profession as a whole...

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