Discuss the relationship between accounting choices made by management and the values reported in financial statements and the possible reasons why those choices are made.

Essay by nwonknuCollege, UndergraduateA, December 2003

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The Age (17 May, 1988) reported that the true picture of Wormald's financial state was revealed by the accountants, Arthur Young. After a request by the National Companies and Securities Commission (NCSC) Arthur Young prepared a revised report, increasing the original loss of $54.8 million to a loss of $255.9 million. This, of course, raises the question of why there was a difference between the reports prepared by the Wormald management and those prepared by the accountants. Section 269(9) states that `the accounts are made out in accordance with applicable approved accounting standards and that, by so doing ensures the accounts give a true and fair view.' (Australian National Companies and Securities Legislation with State variations). It would appear that what constitutes a true and fair view in relation to prepared accounting reports, differs somewhat between what management and the accountants perceive it to be.

Accounting Choices

For many transactions, management is able to choose from a selection of equally acceptable accounting methods, each of which can often give very different results.

Hence, differences in reported results often stem from the different accounting procedures used, rather than differences in performance. It could be suggested that Wormald, because of the availability of different accounting methods, was able to produce what it saw as a desirable result. In other words, the profits may have been manipulated by the choice of suitable accounting methods and amounts disclosed. `Choosing accounting procedures to satisfy management's objectives is sometimes referred to as creative accounting; unfortunately, this often leads to a lack of comparability in accounting reports' (Poole, 1987, pp. 42-48).

Such an example of this can be seen in Wormald's treatment of the abnormal items, doubtful debts and write-downs; inclusion would only have increased the liabilities of the firm, which in turn would have produced...