‘Why Financial Reports Can Never Really Be Considered Neutral (Free from Bias) or Objective.

2933 Words Dec 6th, 2011 12 Pages
REPORT

‘Why Financial Reports can never really be considered neutral (free from bias) or objective.’

Word Count: 2536

Introduction

The Framework for the preparation and presentation of financial statements specifies that information generated should “represent faithfully” and “be neutral… free from bias” (AASB Framework, para. 33; 36). Information that is not neutral can “influence the making of a decision or judgement in order to achieve a predetermined result or outcome” (AASB Framework, para. 36). Many scholars have discussed the theory that financial reporting is biased and subjective, using numerous examples as evidence to support their theories. This report will highlight just a few of the arguments to support the theory
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In the wake of the Enron collapse, numerous issues of financial oversight have been discovered, whereby loopholes in accounting regulation allowed Enron to conceal millions of dollars’ worth of debt and liabilities in special purpose entities that were not required to be consolidated with the corporation’s financial statements (Jickling, 2002). It can be argued that the actions of many involved in this scandal were acting in accordance with the Planned Behaviour theory in that there was pressure to conform to the standards of various parties, and the ability to carry out less than objective financial treatment was aided by poor judgement of Enron’s external Auditors.

Gavin (2003) identifies the various groups of people that have the ability to influence the objectivity of financial reporting by committing actions directly attributable to the theory of Planned Behaviour. He highlights the motivation for such behaviour is commonly driven by arrogance, greed, fear of displeasing their colleagues and/or fear of losing one’s job. Such groups include: Corporate board members; Management; Chief Financial Officer; Internal Accountants; Analysts and Underwriters; Internal Auditors; External Auditors; and Investors.

Positive Theories

Positive Accounting Theories

While the Planned behaviours theory “seeks to explain why people perform certain actions” (Williams, 2011), Positive accounting theory (PAT) aims to “explain and predict particular phenomena” (Deegan,