Accounting Theory - 6586 Words

Assignment Task The four largest Australian Banks have faced considerable pressure from the community and the government in recent times. This pressure has arisen due to their interest rate increases in association with their high reported earnings. As accountants, we are responsible for preparing financial statements and â€Å"calculating† the profit figures. In your opinion, do you think the big banks are managing their reported earnings to show lesser profits than what they are actually earning (i.e. using earnings management techniques)? You are required, and must, read and incorporate academic journal articles and other relevant materials to justify your viewpoint. INTRODUCTION Accounting can be broadly defined as the†¦show more content†¦In order to do so, it is necessary to understand and define earnings Management. Definition of Earnings Management Healy and Wahlen (1999) define earnings management as: â€Å"Earnings management occurs when managers use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers.† Another definition is given by Fields et al. (2001) who state that: â€Å"Earnings management occurs when managers exercise their discretion over accounting numbers with or without restrictions. Such discretion can be either firm value maximizing or opportunistic†. The above definitions highlight the point that ‘managerial intent’ is a criterion for earnings management (Spohr 2005). Several academic literatures seek to point out the activities which can be considered to be earnings management. However, as the definition of earnings management does not rely on any one item of the income statement, it does not need to be directly connected to reported earnings. Its impact is through accounting numbers and may also be directed at financial ratios as opposed to earnings (Schipper 1989). Dechow and Skinner (2000) have classified earnings management as follows: Reporting Type Accounting choices Within GAAP Conservative Accounting - Overly aggressive recognition of provisions or reserves -Show MoreRelatedPositive Accounting Theory2425 Words   |  10 PagesCompare and contrast normative and positive accounting approaches: Definition of PAT: Watts and Zimmerman (1986) defined Pat as a theory that seeks to explain and predicts particular phenomenon. It is concerned with explaining accounting practice. The three basic hypotheses as outlined by Watts and Zimmerman (1978) underlying PAT are: 1. Bonus plan hypothesis: The bonus plan hypothesis is that managers of firms with bonus plans are more likely to use accounting methods that increase current period reportedRead MoreAccounting Theory And Management Accounting2580 Words   |  11 PagesThough forms of managerial accounting practices can be traced back decades, centuries even, management accounting used to be regarded as a financial tool, advantageous for the financial managers. However, over the past three decades views on management accounting have changed. As Kaplan (1994) states management accounting theory has experienced a revolution in both theory and practice with the development of new innovations. Through advances in information technology, more competitive markets andRead MorePositive Accounting Theory Essay1195 Words   |  5 PagesWhittington notes, they are two of the most widely discussed contributors to the accounting literature of the past decade (1989, p. 327). They are also the joint founder-editors of The Journal of Accou nting and Economics, a journal devoted to positive accounting research, which has achieved an international reputation. So their story, while admittedly controversial, has achieved credibility among a significant number of accounting researchers. But what accounts for that credibility? According to WattsRead MoreThe Theory Of Accounting Fraud3500 Words   |  14 PagesA number of cases of fraudulent accounting have been reported over the last fifty years. However, in each case the manner in which the fraud was perpetrated was different In the UK there is no legal definition of fraud (Levi, Information Gathering Working Party and Doig, 1999). Black’s Law Dictionary (1999) defines fraud as â€Å"a knowing misrepresentation of the truth or concealment of a material fact†. When we apply this to the world of accountancy there can be confusion between fraud and ‘creativeRead MoreAccounting Theory- Stakeholders1220 Words   |  5 PagesCurrent Issues in Accounting, South Melbourne: Cengage Learning Freeman RE. 1984. Strategic Management: a Stakeholder Approach. Pitman: Boston, MA Haigh, N., amp; Griffiths, A. (2009). The natural environment as a primary stakeholder: The case of climate change.  Business Strategy and the Environment,  18(6), 347. Retrieved from: http://ezproxy.waikato.ac.nz/login?url=http://search.proquest.com/docview/213770085?accountid=1728 Mitchell RK, Agle BR, Wood DJ. 1997. Toward a theory of stakeholder identificationRead MoreAccounting Theory and Practice Essay2225 Words   |  9 Pagesreached about what perspective theories should be used to explain the Social and Environmental Accounting, and moreover critique voices are from the works of Marx or by the deep-green or feminist literatures (Deegan, 2002), to some extent, systems-oriented theory and Positive Accounting Theory can list some hints. This essay will seek to explain the reasons why firms voluntary disclosure information by referring to Legitimacy theory, Stakeholder theory, institutional theory, and lastly Political CostsRead MoreA Research On Positive Accounting Theory2273 Words   |  10 Pagespositive accounting hypothesis (PAT) estimates that, in flawed markets, accounting decision may be controlled by directors looking to impact reported income and capital structure (Watts and Zimmerman, 1978). Specifically, the positive accounting hypothesis (PAT) contends that accounting decisions are liable to be spurred by components, for example, supervisors extra arranges, the company s obligation/value proportions and the more extensive political impact of outsiders (Watts and Zimmerman, 1978;Read MorePositive vs Normative Accounting Theory Essay1032 Words   |  5 Pageswith planning) TOPIC: Discuss positive accounting theory and contrast it with normative accounting theory. Provide examples where appropriate.       The purpose of this essay is to provide an overview of positive accounting theory (PAT) and highlight how this theory differs to normative accounting theory. Definitions and assumptions of both theories will be considered and examples of the theories will be provided. In addition specific theories related to PAT namely agency and the efficientRead MoreThe Imporance of Accounting Theory to the Field of Accounting1912 Words   |  8 PagesThe Importance of Accounting Theory to the Field Of Accounting The objective of theory is to explain and predict. One of the basic goals of the theory of a particular discipline is to have a well-defined body of knowledge that has been systematically accumulated, organized, and verified well enough to provide a frame of reference for future actions. The Webster’s definition of theory is the systematically organized knowledge, applicable in a relatively wide variety of circumstances, a systemRead Moreaccounting theory Essay1980 Words   |  8 Pagesï » ¿3101AFE Accounting Theory and Practice Tutorial Questions for Tutorials 1- 6: Semester 2 2014 TUTORIAL 1 - Semester 2 2014 Deegan Topic 1: Introduction to financial accounting theory QUESTION 1 - Question 1.8: What is the difference between developing a theory by induction and developing a theory by deduction? QUESTION 2 - Question 1.9: Is the study of financial accounting theory a waste of time for accounting students? Explain your answer. QUESTION 3 - Question 1.26: Would you