The paper is a review of the effects of accounting choices on users of financial statements. First of all, a historical examination in the subject matter was examined. It was found that most researches normally dwell on single characteristic effects of accounting decisions on financial statement users. Current GAAP on the matter also agreed with the latter matter.
It was therefore found that it may be necessary to look at how these factors intertwine in affecting users of financial statements. Since firms may be required to content with a number of effects at any one time, it is important to prepare a study on a set of factors. Thereafter, an analysis ought to do to investigate which factor is the mot important and which one takes least precedence. This can go a long way towards assisting managers and other financial decisions makers about accounting choices in the future.
A Parade Of Theory Of The Firm Information
A lot of research has been made with regard to voluntary accounting choices. This is largely because the effects of such choices are more clear cut and predictable. A number of accountants have utilized the issue of accounting discretion in order to minimize their financial performances during periods of string performance and also to overstate their financial status in periods of low performance, for instance.
Of course, there’s so much to consider regarding theory of the firm
Incentives are weak, in the effect that good performance goes relatively unrewarded and bad performance relatively unpunished.
Managers tend to use income increasing tactics when there are interested in enacting strategic changes.
In fact, it has been demonstrated that most financial users tend to assume that any income increasing measure enacted by their managers is in close relation to the overall nature of these types of objectives. In other words, employees are less likely to be affected by positive or income increasing accounting decisions than by income decreasing accounting decisions. When managers opt to increase their income, chances are that employees may assume that this is one of a strategy to achieve an industry benchmark. Consequently, they’re less likely to believe it.
On the other hand, when managers make accounting decisions to decrease their overall incomes in their financial statements, then employees are far more likely to believe the latter results than if incomes had been increased. This is largely because such employees may assume that the reflections being put out by their employers have been one in order to take into account the economic situations prevailing at that time. In other words, it may be required for firms to prepare for skepticism in the first case than in the second one.
In close relation to income decreasing or income decreasing acts in financial statements is the question of the qualification in making accounting decisions. Users are likely to regard qualified income reducing acts as being more strategic in nature than unqualified income decreasing acts. This is the case because when the acts are qualified, then chances are that the users would asses the firm in a more positive light only if the financial statement hadn’t been qualified.
Statistics indicate that users react more positively to income decreasing changes even when comparing them to industry benchmarks. This is normally because most people may treat this as being representative of occurrences within the industry under consideration and therefore leaving room for growth.
On the other hand, when incomes are seen as being way above industry benchmarks, then users are likely to believe that those benchmarks don’t represent the goings on their particular industry. This means that they may treat such a modification as being deviant from the norm. Users may assume that this kind of firm cannot survive within its industry of operation and that the evaluation of that firms performance is therefore below par in reality because of this.
It should b pointed out that a number of financial statement users are highly influenced by the accounting policies in certain firms or the level o adoption of accounting standards. This is commonly the case when considering foreign investment. In other words, there are situations under which a certain investor may be addressing the issues surrounding that particular scenario especially with regard to the type of changes affecting a certain party.
An example of how this can be viewed is through examining the relationship between two states such as the US and Australia. It is likely that a US foreign investor will be most interested in making investments within countries that are US GAAP aligned. This factor is quite important in accounting decisions and hence accounting effects because only has to look at accounting policies of a number of developed nations to understand this. The US is one of the heaviest foreign investors in Australia. In order to appeal to the last group, it was noted that Australian accounting standards took a turn and began conforming to the US institutional frameworks and likewise to their GAAP.
Financial statement users are likely to remain indifferent to changes made by their employees in the case where the accounting decision is an income decreasing one but a qualified one. This is largely because users are likely to attribute such changes to either strategic reason or to reflect economic conditions within a certain industry. This means that those changes may indicate the overall problems facing these groups when it is a question of the process of enacting these changes.
When accounting policies are voluntarily done in order to come forward with the most influential choices on foreign ownership, then chances are that they are able to attract greater investments if they’re aligned to the foreign investors institutional holdings or if they’re also associated with the joint determinants under consideration.
Income increasing acts may also solicit different reactions in the vent that they have been qualified or if they’re not qualified. Expert opinion suggests that financial statement users are far more likely to believe them if they’re qualified.
In the agency theory, firms are seen as a point of convergence of contracts. This means that a number of users of financial statements view accounting choices as means against which firms can get incentives. The incentives are important determinants as part of the process of making accounting decisions largely as they can make the distinction between the detriment or survival of a number of corporations.
In other circumstances, firms facing financial distress may be motivated to make accounting decision that can subsequently affect their jobs or their firms altogether. In other words, some troubled firms may consider their situations as being temporary. This means that their greatest concerns may not be to get accounting bonuses. Instead, their focus may be on restoring the financial position of their firms and making the best use of their form of arrangements.
It has also been shown in a number of researches that new CEO tend to deflate their incomes when accompany has been recording poor financial management in the previous year. This is an aspect that has been carried forward in a number of firms that may be considered as financially troubled ones.
It should also be pointed out that accounting decisions in the latter category may also made in order o reduce incomes. This creates an image of a society that is vulnerable.
In other circumstances, forms undergoing financial distress may be motivated to make accounting decisions in order to deal with management changes that may have occurred at the time. This is usually the case when the incumbent management is of the opinion that the new firm he or she is operating is dealing with lower performance than was the case in the preceding regime. Such mangers may be interested in displaying positive light to domestic and external stakeholders of the firm under consideration.
In other situations, it may be possible to reach that other firms are undergoing government assistance investigations. These are usually those firms that are able of getting incentives on the part of the government if it concluded that their management principles are in order. Usually, such firms are likely to make accounting decisions that would affect them in a positive light by making them liable to receive incentives from the investigators.
In other researches, it has been found that firms facing financial difficulties may have to deal with large accrual especially during their first year in dividend reductions. This means that a firm may be confronted with more than one particular financial challenge at a time.