‘Why Financial Reports Can Never Really Be Considered Neutral (Free from Bias) or Objective.
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 that financial reporting can never really be considered neutral, or objective.
Discussion
Before determining if financial reporting is truly free from bias, it is first necessary to identify what the term bias implies. According to TheFreeDictionary.com, bias is “a circumstance leading to inaccurate results because of conscious or unconscious manipulation of data”.
Deegan (2009) notes that “the conceptual frameworks support a perspective that accounting can, if performed properly, provide an objective (neutral and representationally faithful) view of the performance and position of a reporting entity” (p. 232). However, due the continuous change and evolution of business practices and emergence of new business sectors, the complexity of accounting transactions increases, giving rise to loopholes within the standards allowing for subjectivity and inconsistency to become more commonplace throughout financial reporting (Rupalia, n.d.).
It can be argued that non-objective financial reporting is a result of two core issues: interpretation of accounting standards by preparers; and the conscious and unconscious bias of preparers and report users. The circumstances that cause bias to arise are examined in this section of the
‘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 that financial reporting can never really be considered neutral, or objective.
Discussion
Before determining if financial reporting is truly free from bias, it is first necessary to identify what the term bias implies. According to TheFreeDictionary.com, bias is “a circumstance leading to inaccurate results because of conscious or unconscious manipulation of data”.
Deegan (2009) notes that “the conceptual frameworks support a perspective that accounting can, if performed properly, provide an objective (neutral and representationally faithful) view of the performance and position of a reporting entity” (p. 232). However, due the continuous change and evolution of business practices and emergence of new business sectors, the complexity of accounting transactions increases, giving rise to loopholes within the standards allowing for subjectivity and inconsistency to become more commonplace throughout financial reporting (Rupalia, n.d.).
It can be argued that non-objective financial reporting is a result of two core issues: interpretation of accounting standards by preparers; and the conscious and unconscious bias of preparers and report users. The circumstances that cause bias to arise are examined in this section of the
References: Carpenter, T., Reimers, J. (2005), ‘Unethical and fraudulent financial reporting: applying the theory of planned behaviour’, Journal of Business Ethics, Springer 2005. CPA 2010, Accounting Handbook, 2010 edn, Pearson. Deegan, C. (2009), Financial Accounting Theory, 3rd edn, McGraw Hill, Sydney. Drever, M., Stanton, P., McGowan, S. (2007), Measurement and its problems, Contemporary Issues in Accounting, John Wiley & sons Australia, QLD. Gavin, T. (2003), Improving financial reporting process, Commercial Lending Review. Henderson, S., Peirson, G., Herbohn, K. (2011), Issues in Financial Accounting, 14th edn, Pearson Australia, Sydney. Pederson. T. (2011), Unbiased professional judgements are actually biased, Psych Central, Retrieved October 13, 2011 <http://psychcentral.com/news/2011/09/24/unbiased-professional-judgments-are-actually-biased/29754.html> TheFreeDictionary (2011), accessed 26th October 2011, <http://financial-dictionary.thefreedictionary.com/bias> Rupalia, N