After standpoint on accounting profit figure cannot be

After finishing the Accounting in Context
module, my standpoint on accounting profit figure cannot be the only measure of
the true profit of an organisation turns out to be more solid. This is remarkably accurate under the
idea of managers are motivated to act or behave by the maximisation of
economic benefit and the relationship of principal agent among the managers
and investors who have the tendency to behave as exclusive entities in
most of the time. These theories are
also being implicitly emphasised throughout the classes and lectures which
comes under the positive, critical and normative accounting theories. Moreover,
my previous standpoint also became more solid after it was made clear to me on
how the analysation of financial reports of an organisation should be. Both the
theories and also the analysation of financial reporting mentioned above will
be further discussed throughout my writing.

 

Normative theory focuses
on the steps of the financial
accounting that should be followed after considering other informations to make rational
decisions (M. W. E. Glautier, Underdown B.,
2001, Accounting Theory and Practice, p.20). The case was centered on the outcome of shifting market situations on how to value
and measure assets given there were several accounting policies involved. The
accounting policies used include current purchasing power, adjusted historical
cost and historical cost accounting. The differences in the profit resulted
from the different accounting policies used to make the adjustment. For
example, rate of inflation, cost of replacement, holding gains and losses. This
will somehow give opportunities to the managers to manipulate the financial
statements by using any accounting policies that will favour them in order to
boost their performances. Therefore, the statements might not provide the
accurate representation of the organisations.

 

Other than that, another case that
need to be emphasised would be the fair value measurement. This relate to substantial
judgements by the managers and also estimation uncertainty. As mentioned above, we can assume that the presence of both of
these could influence the profit. Since the managers have control over the
figure, they can easily manipulate it even it does not coincide with the shareholders’
aims. Given the fact that the managers have the opportunities to manipulate the
profit figure, we can say that there is more than just accounting profit figure as the measurement of the
true profit of an organisation.

 

 

 

 

 

 

These opportunities to manipulate
are further supported under the Positive Accounting Theory(PAT): “PAT takes the
view that firms organise themselves in the most efficient manner, so as to
maximise their prospects for survival” (William R. Scott, 2009, Financial
Accounting Theory, p. 299). Under the positive accounting theory, there are
three hypotheses namely bonus plan, debt covenant and political cost
hypothesis. All these hypotheses are the main components of PAT and they show in
what way will the managers react to give them the most benefits by applying the
accounting policies in which in the end will produce a positive profit
indicated, for example, negotiating debt contract and ‘big bath’ method. (Belkaoui
A. R., 2004, Accounting Theory, p. 446-450).

 

Be that as it may, does it truly
comes down to artful conduct? Imagine a situation where the managers cannot
control their actions and have no other choices due to the external factors encompassing
them, for example, remunerating framework by means of benefit figure, fretful
investors and so forth. Wouldn’t these drives them to make decisions in the
previously mentioned manners if that is the only way to maintain their jobs? Certainly,
something for us to think about. By and by, once more, these opportunities in
controlling the profit obviously proves that taking into account the accounting
profit as the only source of calculating the true profit is no longer relevant.

What’s more, the way toward evaluating financial statements amid to the class also
strengthens my underlying view with respect to the accounting profit. This is
due to the one off transaction made by the businesses that might distort the
figure of the true profit. Further clarification needs to be made in order to
help with the decisions making due to the existence of approximations and assumptions
in measuring the value of assets and liabilities. IASB had covered this part by
the need for the managers to provide additional disclosures as one of the
accounting standards. Due to this standard set by the IASB, the measurement of
a true profit by using the accounting profit figure might be relevant.

 

Nevertheless, it got me thinking
after perusing the point of view from the theorists when the relevancy and
dependability of the present accounting framework were addressed. Particularly
subsequent to knowing how capable accountants can be. From the articles by Ruth
D. Hines: “In Communicating Reality, We Construct Reality”, the feedback and
the point of view set forward particularly on the practical application of
accounting hit me hard. This is because the article supports disparity in the
societies through the social structure. Does it mean that the true and fair
view concept which had been part of the accounting practices are actually not
true and fair? If not, what is considered true and fair view in terms of
producing the financial statements? As cynical as it might appear to be, these
viewpoints definitely need to be reviewed when assessing companies’
performances to avoid making the wrong decisions. In any case, in spite of the
distinctive perspectives and speculations showed, it can be concurred that all of
these in the end lead to a similar deduction that figure of the accounting
profit cannot be the only measurement to see the true profit of an organisation.