If other words; a lot is acquired within

If one could measure the
learning curve I had gained for the past few months, it would be rather steep –
in other words; a lot is acquired within a short span of time. Looking back, my
unsophisticated mind was not able to project the big picture of ‘profit figure’
and literally making pound-to-pound comparison in production line; something of
which I would not be proud of today. Nevertheless, there are some merits in my
concluding paragraph that raised the concern on the ‘importance of implicit
costs’ that have been deliberately overlooked and seek for further evaluation
(Author 2017 Part 1). After going through a transformative period learning this
theory-packed module, I began looking at profit figures more cautiously on a
different set of lenses. One true accounting profit figure is merely a figment
of an accountant’s imagination and hardly admissible. I am now able to substantiate
the truth and faithful representation more firmly, which I have comprehend
throughout learning this module.


When accounting for figures on
the financial statement, accountants are heavily influenced by personal
feelings and subjective evaluations are taken in place. This ties up to the
point of subjectivity that is raised in the last few lines of Part 1 (Author
2017) that seems consistent with Hines (1988) on how accountants dictate the
creation of reality. In constructing the status quo, accountants are able to include
or omit any details when building up to a single accounting profit figure – the
likes of an artist with a blank canvas. It echoes by Hines (1988); “But as
official Communicators of Reality, we have more power than most” (Hines, 1988,
p. 255). Essentially, this would lead to a wide range of profit figures
depending on the person calculating them, hence vulnerable to creative
accounting methods that exploit the loopholes in the accounting standard to
arrive at a more favourable figure. This is proven in the case of Enron when
its hyper revenue growth surprised the financial market after climbing up
Fortune 500 to Number 7 in no time. Enron’s accountants had adopted duplicitous
accounting techniques, more precisely, mark-to-market (MTM) policy and
aggressive accounting interpretation to boost the revenue from $13.3 billion to
$100.8 billion in just 4 years (Dharan and Bufkins, 2008).

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The ‘level playing field’
arguments hold by the pro-regulation perspective became the bedrock of the
public interest theory in dealing with the nature of accounting. Public
interest theory emphasises that the accounting information is a public good and
society needs confidence in the capital market, in order for it to function
effectively. They also believe that regulatory setup is needed to protect
various stakeholders in the economy. The absence of check and balance system
would result in severe market failure due to ambiguous accounting information (Deegan
and Unerman, 2011). Today, accounting standards are streamlined with the
establishment of regulatory bodies such as International Accounting Standards
Body (IASB) that formulate the Conceptual Framework (IASB, 2015).


The need to establish regulatory
bodies is in line with the nature of profession as suggested by Wagner (1965),
insisting that an accountant’s prime asset is called professional judgement. As judgment emanated from the mind, it is
essential for us to condition our mind in a certain way to instil conformity in
work process. Objectivity is what being seek by the accountants, although we
cannot expect such perfection, the absence of perceptual defects in exercising the judgement is the closest we
could ever get (Wagner, 1965). I strongly believe the arguments laid out
beforehand are in the favour of setting up the regulatory framework in the
first place. However, private interest theory holds that regulators themselves
are publicly known to have interest in controlling the industry and to maintain
position in this privileged community. More often than not, they ought to
please the big companies/lobbyist for their own benefit (Anderson-Gough, 2017)
and at times, under-the-table alterations were made to the said policies to
meet the client’s requirement. This notion is further strengthened by capture
theory hypothesis, asserting that regulated subjects will try to obtain control
of regulatory body because they know the decisions made by regulators will
significantly impact their business model (Deegan and Unerman, 2011).


Week 7 lecture delivered by
Professor Yuval Millo on Positive Accounting Theory was perhaps the most
eye-opening experience for me in learning this module. Prior to this, I was
convinced that managers – bounded by the code of conducts and ethics – would do
their utmost to align themselves with the interest of shareholders. I could not
have been more wrong. This theory explains the reasoning behind a manager’s
choice using three powerful hypotheses namely the bonus plan hypothesis, debt covenant
hypothesis and political cost hypothesis. For example, short-term profits
became the focal point among the managers in Enron because they adopted the
performance reward system (Dharan and Bufkins, 2008). They were responsible in
choosing less conservative and less volatile accounting policies to smooth
things over in order to project higher earning. This is a concrete evidence of
the bonus plan hypothesis. 


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