ACCTNG5000 CH3 HW Q
CH. 3 HOMEWORK DISCUSSION QUESTION 3, 4 & 5
3.) Bill Simon says, “We should get rid of the FASB and SEC since free market forces will make sure that companies report reliable information.” Do you agree? Why or why not?
I disagree for several reasons. One, investors view profits a measure of managers’ performance, therefore giving managers an incentive to use their accounting discretion to distort reported profits by making biased assumptions. Many top managers receive bonus compensation if they exceed certain pre-specified profit targets. Furthermore, stock option awards can also entice a manager to manage earnings in their favor. Regulation and generally accepted accounting standards help deter managers’ from taking this too far. Managers of some firms may make accounting decisions to influence regulatory outcomes in such situations where accounting numbers are used like in tax policies and import tariffs. Accounting decisions by managers may also be made to influence the perception of important stakeholders and capital markets.
Uniform accounting standards reduce managers’ ability to record similar economic transactions in dissimilar ways, ultimately creating a uniform accounting language and increasing the credibility of the financial statements by limiting a firm’s ability to distort them. The potential threat of lawsuits and penalties generally improves the accuracy of disclose. Significant legal liability enforced by the SEC tends to also discourage management and auditors from supporting accounting proposals where management and auditor judgment, as well as increased complexity come into play. Ultimately, without the SEC or FASB, managers would not have to disclose any information and the quality of accounting would significantly decrease.
4.) Many firms recognize revenues at the point of shipment. This provides an incentive to accelerate revenues by shipping goods at the end of the quarter. Consider two companies, one of which ships its product evenly
3.) Bill Simon says, “We should get rid of the FASB and SEC since free market forces will make sure that companies report reliable information.” Do you agree? Why or why not?
I disagree for several reasons. One, investors view profits a measure of managers’ performance, therefore giving managers an incentive to use their accounting discretion to distort reported profits by making biased assumptions. Many top managers receive bonus compensation if they exceed certain pre-specified profit targets. Furthermore, stock option awards can also entice a manager to manage earnings in their favor. Regulation and generally accepted accounting standards help deter managers’ from taking this too far. Managers of some firms may make accounting decisions to influence regulatory outcomes in such situations where accounting numbers are used like in tax policies and import tariffs. Accounting decisions by managers may also be made to influence the perception of important stakeholders and capital markets.
Uniform accounting standards reduce managers’ ability to record similar economic transactions in dissimilar ways, ultimately creating a uniform accounting language and increasing the credibility of the financial statements by limiting a firm’s ability to distort them. The potential threat of lawsuits and penalties generally improves the accuracy of disclose. Significant legal liability enforced by the SEC tends to also discourage management and auditors from supporting accounting proposals where management and auditor judgment, as well as increased complexity come into play. Ultimately, without the SEC or FASB, managers would not have to disclose any information and the quality of accounting would significantly decrease.
4.) Many firms recognize revenues at the point of shipment. This provides an incentive to accelerate revenues by shipping goods at the end of the quarter. Consider two companies, one of which ships its product evenly