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Creative Accounting: Some Ethical Issues of Macro- and Micro-Manipulation

Author(s): Catherine Gowthorpe and Oriol Amat

Source: Journal of Business Ethics, Vol. 57, No. 1, Thirteenth IESE Symposium "Ethics,
Business and Society": Accounting and Accountability: A Challenge for Corporate Culture
(Mar., 2005), pp. 55-64
Published by: Springer
Stable URL: https://www.jstor.org/stable/25123453
Accessed: 08-03-2019 14:45 UTC

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Journal of Business Ethics 57: 55?64, 2005. ? 2005 Springer
DOI 10.1007A10551-004-3822-5

Creative Accounting: Some

Ethical Issues of Macro- and
Catherine Gowthorpe
Micro-Manipulation Oriol Amat

ABSTRACT. Preparers of financial statements are in a morally reprehensible. They are not fair to users, they
position to manipulate the view of economic reality involve an unjust exercise of power, and they tend to
presented in those statements to interested parties. This weaken the authority of accounting regulators.
paper examines two principal categories of manipulative
behaviour. The term 'macro-manipulation' is used to KEY WOPJDS: Accounting ethics, accounting regula
describe the lobbying of regulators to persuade them to tion, creative accounting, earnings management, financial
produce regulation that is more favourable to the interests reporting, macro-manipulation, micro-manipulation
of preparers. "Micro-manipulation" describes the man
agement of accounting figures to produce a biased view at
the entity level. Both categories of manipulation can be
viewed as attempts at creativity by financial statement ABBREVIATIONS: APB, The Accounting Prin
preparers. The paper analyses two cases of manipulation. ciples Board; ASFJ3, Accounting Standards Review
First, it describes a recent case of significant and successful
Board; FASB, Financial Accounting Standards
lobbying against the accounting regulator in the USA.
Board; IASB, International Accounting Standards
The second case examines some recent Spanish earnings
Board; IASC, International Accounting Standards
manipulation to demonstrate the effects of biased
Committee; ICAC, Instituto de Contabilidad y
reporting at the entity level. Both types of creativity are
considered in an ethical context. The paper concludes Auditor?a de Cuentas (Spanish Institute of
that the manipulations described in it can be regarded as Accounting and Auditing); IFRS, International
Financial Reporting Standards; IOSCO, Interna
tional Organization of Securities Commissions;
Catherine Gowthorpe is a Research Fellow in Accounting at
PGC, Plan General de Contabilidad (Spanish
Oxford Brookes University. She is the author and editor of
Accounting Plan); SEC, Securities and Exchange
many books and articles on accounting, some of them in the
field of ethics and accounting, including Ethical Issues in
Accounting (Routledge, 1998). She has published in journals
such as Business Ethics: a European Review, European
Accounting Review, European Business Review and The Introduction
International Journal of Accounting.
Oriol Amat is a Professor of Accounting and Chair of the Financial statements provide information that is used
Department of Economics and Business at the Universit?t
by interested parties to assess the performance of
Pompeu Fabra (Barcelona). He is Vice-president of the
managers and to make economic decisions. Users
Catalan Association of Accounting and Management (AC
may assume that the financial information they re
CID) and member of the Spanish Association of Accounting
and Business Administration (AECA). He is the author and
ceive is reliable and fit for its purpose. Accounting
editor of several books and articles on' accounting. He has regulation attempts to ensure that information is
published in journals such as Business Ethics: a European produced on a consistent basis in accordance with a
Review, European Accounting Review, European Business set of rules that make it reliable for users. However,
Review, European Management Journal and The Interna communications between entities and shareholders
tionaljournal of Accounting. may be deliberately distorted by the activities of

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56 Catherine Gowthorpe and Oriol Amat

financial statement preparers who wish to alter the United States. The second examines some recent
content of the messages being transmitted. This type evidence from Spain on the manipulation of financial
of distortion is often referred to as "creative statements that takes place at the entity level. The
accounting" or "earnings management". While discussion then moves to consideration of ethical
opinions on the acceptability of accounting manip issues of respect, fairness, justice and personal morality.
ulation vary, it is often perceived as reprehensible.
This paper aims to identify some manipulative
behavior on the part of preparers of financial state The accounting regulatory background
ments, taking into account some important ethical
concerns. To achieve this, we will broaden out the Accounting is regulated in most countries by two
usual definition of creativity in accounting to principal means: first, local laws relating to corporate
examine two principal categories of behaviour by and other bodies, and second, a system of accounting
the preparers of financial statements regulation in the form of standards. These are often
promulgated by non-governmental organisations
? Macro-manipulation. When preparers become and foundations. Also, in recent years, a supra-na
aware of a proposal to alter accounting regulation tional body, the International Accounting Standards
in a way that they feel will be disadvantageous to Committee (IASC) has become more important in
them, they may engage in lobbying to attempt to setting standards. The IASC came into being in 1973
prevent the change. They attempt to bring about via an agreement by several leading national pro
an alternative depiction of economic reality which fessional accountancy bodies. In the period between
is more favourable to them. In this paper we 1973 and 2001 it grew in status, authority and
identify this type of behaviour as macro-manip membership. By 2001 it was poised to become the
ulation. de facto supra-national standard setter for much of
- Micro-manipulation. Creative accounting at an the world. A key point was gained with the agree
individual entity level involves preparers in alter ment, in 1995, with the International Organization
ing accounting disclosures so as to create the view of Securities Commissions (IOSCO), that the IASC
of reality that they wish to have communicated to would be responsible for developing a set of "core
users of the financial statements. This type of standards". If these were agreed by IOSCO they
behaviour is described in this paper as micro would be endorsed for use in aU global markets. This
manipulation. endorsement took place in 2000. In 2000, the IASC
decided to alter its constitution: from 2001 the
In both cases, preparers are interested in creating the standard setting body was reconstituted as the
financial statements to suit their own purposes. International Accounting Standards Board (IASB),
Of course, they may genuinely feel that their view of to be responsible for issuing International Financial
economic reality is preferable from all points of Reporting Standards (IFRS). The IASB is currently
view. However, it is also possible that they seek to in the process of addressing some highly complex
distort the picture to meet their own needs or de technical issues that wiU, in due course, result in the
sires. This paper identifies and discusses some sig publication of further IFRS.
nificant ethical issues related to these manipulations In 2001 the European Commission took the
of accounting reality. decision to present legislation that required the
The paper proceeds as follows: first, the principal adoption of international standards by the listed
features of the current accounting regulatory landscape companies of aU member states from 2005 onwards.
are described. The purpose of regulation, and the Similar arrangements wiU shortly come into operation
objective of financial statements are explained, and in Australia and New Zealand. It can be expected that
then the paper goes on to discuss the ways in which several national standard setting bodies around the
preparers of financial statements may confound the world wiU graduaUy become less important, and may
intentions of the regulators. We then consider two even eventuaUy cease to exist. However, a national
cases of manipulation. The first concerns a case of standard setter that is likely to exist into the foreseeable
lobbying over a significant accounting issue in the future is the Financial Accounting Standards Board

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Some Ethical Issues of Macro- And Micro-Manipulation 57

(FASB) in the USA. Until recently, it appeared quite down the barriers that hamper the operations of the
possible that U.S. standard setting might proceed international capital markets. However, there are
autonomously without much regard to the activities some structural weaknesses in accounting regulation,
of the IASB. However, a convergence project has as we aim to show here.
been launched and it is likely that there will be some
significant movement towards convergence over the The purpose of accounting regulation
next few years.
This paper is based in part upon the proposition that
accounting regulation has an important function in
The "infrastructure of financial reporting" society. It affects the allocation of economic resources,
and so it has potentially wide-ranging effects upon
Schipper (2000) identifies four elements as forming social welfare and the balance of economic power
part of "the infrastructure of financial reporting": between parties with often competing interests. Prior
to the 1970s accounting regulatory bodies were not
1. The effectiveness of mechanisms for identifying generally much concerned with the consequential
and resolving interpretative questions. effects of their actions on such matters as distribution
2. The structure, processes, independence, expertise, and economic well-being. However, from the 1970s
incentives and resource base of the standards set
onwards, economic impact issues were recognised as
ting organisation, being of increasing importance. For example, Zeff
3. Auditing and auditors. (1978) recounts several instances of behaviour on the
4. Enforcement of accounting standards and the part of lobbyists that made the Accounting Principles
supporting regulations. Board in the United States (the predecessor of the
current (FASB)) increasingly aware of the impact of its
In many national systems, one or more of these
actions. He identifies several factors leading to the
elements can be found to be relatively weak (for
recognition of economic consequences as an issue of
example, U.K. accounting regulation was relatively
primary importance, including the following:
weak in respect of the first and second elements until
the early 1990s when the national accounting reg A general societal trend towards holding institu
ulatory system was overhauled). tions accountable for their actions;
Although international accounting regulation can The sheer scale of the potential economic impact
claim to possess the first two of Schipper's (2000) four of accounting regulation;
elements, it is vulnerable in respect of enforcement Increasing awareness of the information eco
mechanisms and in respect of auditing and auditors. nomics and social choice literature.
The IASB has to rely upon national systems and these
are likely to be patchy and inconsistent. Fearnley and The growing awareness of economic impact issues
Macve (2001) identify some of the principal weak informed the debate that took place in the last
nesses prevalent in national systems of compliance: 30 years or so of the 20th century about the estab
weak support mechanisms for auditors, lack of effec lishment of a conceptual framework for accounting.
tive sanctions against directors, and differences The impetus for the establishment of a conceptual
between the legal framework and practice. Cairns framework started in the U.S.A. where the first
(2001), summarising the findings of his International serious work was done on this type of project.
Accounting Standards Survey published in 2000, However, conceptual frameworks have subsequently
notes a substantial level of non-compliance with been promulgated elsewhere (for example, in Aus
international standards amongst companies claiming tralia and the United Kingdom and at an interna
to adopt them. tional level by the (IASC)). The frameworks define
Current developments in accounting regulation the fundamental purpose of financial statements,
are proceeding rapidly, and the movements towards specify the parties who have a right to take an
convergence and even international standardisation interest in the products of financial reporting and
are welcomed in many quarters as helping to break estabhsh definitions of the key elements of financial

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58 Catherine Gowthorpe and Oriol Amat

accounting, such as assets and liabilities. The objec not always predictable (this is a significant ethical
tive of financial statements is defined as follows in problem in its own right that wiU be the subject of a
the Framework for the Preparation and Presentation of separate paper). Another problem, however, and the
Financial Statements published by the IASC in 1989: one with which this paper is concerned, is that when
the stakes are high there are considerable incentives
"The objective of financial statements is to provide for financial statement preparers to confound the
information about the financial position, performance
work of the regulators.
and changes in financial position of an enterprise that is
There are two principal means by which the
useful to a wide range of users in making economic
intentions of the regulators can be confounded by
decisions" (paragraph 12).
preparers. First, preparers may lobby against pro
posals for rules that wiU have an adverse effect upon
Accounting regulation, in the form of accounting
the financial statements prepared by their entities.
standards, is based upon this objective which is stated
Second, where strict appHcation of the rules does not
in terms of utility to broadly defined groups in
produce an accounting result that meets the needs of
society. It is worth observing, too, that the user
preparers, there is an incentive to misapply or to
groups described in the Framework statement (and the
ignore the rule. This condition can pertain only
other conceptual framework statements) are exten
where regulation is weak and/or is inadequately
sive in nature, covering investors, employees, lend
enforced. Both of these means involve manipulation,
ers, suppliers, customers, governments and the final
but the first is at the macro level of policy, and the
catch-all of the public. However, priority is awarded
second at the micro level of the business entity.
to the information needs of investors as the providers
The term "creative accounting" is generaUy ap
of risk capital to business.
plied to the type of manipulation that takes place at
So, in summary, financial statements are geared
the level of individual business entity. However, we
towards decision-making by various different types characterise both the macro- and micro-activities as
of user, but the user group of most importance
creative processes: in both manifestations preparers
consists of the risk-taking investors. Accounting
are busily engaged in managing financial accounting
regulators are attuned to the needs of this group in
disclosures to their own ends. In both cases preparers
particular, and are concerned with the economic
assert the primacy of their own views of the world
consequences of the standards that they promulgate.
and seek to dominate the reporting process with
their partisan version of the truth.
Confounding their policies: preparers vs. In order to iUustrate the nature of the problems
regulators identified so far, the next two sections of the paper
provide detailed examples of accounting manipula
As Zeff (1978) observed, an important factor in tion. The first examines a case of recent successful
accounting regulation is the sheer scale of the eco macro-manipulation in the United States where a
nomic impact of accounting rules. The choice of an highly significant policy decision by the principal
accounting rule may have a very significant impact accounting regulator was confounded by successful
on, for example, reported profits. The level of pr?parer lobbying.
profitability of a commercial entity potentially affects The second case looks at micro-rnanipulation at the
distributions to owners, wage and salary negotia individual accounts level. The case selected for exam
tions, levels of pensions funding, ability to borrow or ination is that of Spain, where, as wiU be seen, quite
to raise further risk capital, taxes paid and so on. The overt manipulation of earnings figures takes place.
stakes are high, especially in the context of major
national or multi-national corporations whose Goodwill accounting in the USA: a case of
activities have consequential effects on the lives of macro-manipulation
many people. Regulators may attempt to take the
economic consequences of their actions into ac In July 2001 FASB, the U.S. accounting regulator,
count, but they are likely to be confounded in many issued two new standards: FAS Statement no 141
ways. For one thing, the consequences of actions are Business combinations and FAS Statement no 142

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Some Ethical Issues of Macro- And Micro-Manipulation 59

Goodwill and other intangible assets. FASB had devoted a pletely outlawed, a proposal which was eventually to
great deal of time over a five year period to its project form a significant part of SFAS 141. Ayers et al.
on business combinations. The principal concern was (2000), writing before the issue of the standard itself,
the status of pooling of interests (merger) accounting. had estimated, based upon examination of many
This is a relatively complex area of accounting, but transactions accounted for by the pooling method,
suffice it to note that pooling of interests generally that the elimination of the pooling method in U.S.
produces combined statements that show the com accounting would have significant economic
bination in much better light than under the alter consequences in that, for example, earnings per share
native method of acquisition accounting. The and return on equity would deteriorate.
Accounting Principles Board (APB), the predecessor The worsening of key ratios which results from
body to FASB, had discussed the issue as early as 1968 recording combinations via the purchase method no
with a view to eliminating the use of the pooling doubt had much to do with corporate America's
method of accounting for combinations. The initial reluctance to accept the elimination of the pooling
result of the deliberations had been a preliminary method. The technology company Cisco (2000), a
recommendation to eliminate the pooling method significant lobbyist against FASB's proposals, pro
altogether, but the APB was persuaded to retreat from vided the following list of dire consequences3 which
this hard line position. According to Zeff (1978) the could follow FASB's standard:
APB appeared "almost as a pawn in a game of political
chess.. .as it abandoned positions of principle in favor Impeding of innovation and investment in new
of an embarrassing series of pressure-induced com technologies.
promises" (p. 59). APB Statement No 16 instead Slowing of overall economic growth of high-tech
established a set of 12 restrictive criteria to be met companies.
before the pooling method could be adopted. Al Significant reduction in merger and acquisition
though APB Statement No 16 restricted the use of activity.
the pooling method, according to Ayers et al. (2000), Impact on shareholder value and artificial reduc
subsequent research suggested that "... managers tion in corporate earnings.
prefer this accounting method and are willing to incur Reduction in the number of small enterpreneurial
significant costs to avoid the recognition of additional companies able to develop or compete with
assets and expenses associated with the purchase established companies.
method" (p. 2).
Pooling has been heavily used: one recent esti One of the technical accounting issues that arises
mate is that in 1998 around of 55% of new business where acquisition accounting is carried out is that, in
combinations (out of a total of 11,400 transactions) most acquisitions, there is a difference between the
were accounted for under the pooling method price paid for the business and the value of the net
(Ayers et al., 2000). FASB's concerns about the issue assets acquired. This difference is known as goodwill,
included the following: and accounting for it has occupied the minds of
standard setters and preparers for decades. If it is
The issue of comparability between groups of treated as an asset and amortised, it can have a sig
companies. nificant effect in depressing reported profits. An
The heavy utilisation of regulatory resources upon alternative accounting treatment involves treating
the results of this method of accounting (FASB goodwill as an asset, but not subjecting it to regular
and SEC staff were spending "considerable time" amortisation. Instead, the asset would be regularly
interpreting financial statements produced under tested for so-called "impairment", that is, tested to see
the pooling method). if its value has reduced. Only if it can be proved that it
The underlying substance of genuine pooling is has lost value, would there be any effect on profit.
rarely encountered in practice. Initially, FASB proposed to reduce the maxi
mum acceptable period for amortisation of
FASB therefore proposed, via an exposure draft goodwill from 40 to 20 years (which would mean
issued in 1999, that the pooling method be com that many businesses would have to set higher

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60 Catherine Gowthorpe and Oriol Amat

amounts of amortisation against their profits, thus that meets the needs of preparers, there is an
reducing reported earnings and earnings per incentive to misapply or to ignore the rule. Creative
share). Strange to relate, during the course of accounting (also known as income smoothing,
discussions and hearings FASB's view changed, earnings management, cosmetic accounting or
and the Board decided to take a non-amortisation financial engineering) has been variously defined as
approach to goodwill. In FASB's annual report
".. .the deliberate dampening of fluctuations about
the chairman reported this highly significant
some level of earning considered to be normal for the
change in neutral terms: "Rather than have
firm". (Barnea et al., 1976)
companies write off goodwill against earnings
for up to 20 years as originally proposed, after ".. .any action on the part of management which af
thorough analysis we concluded that it would be fects reported income and which provides no true
more appropriate to test goodwill for impair economic advantage to the organization and may, in
ment" (Financial Accounting Foundation, 2000). fact, in the long-term, be detrimental". (Merchant and
Rockness, 1994)
This was clearly a politically motivated concession
to its critics. One of the principal reasons for ".. .[involving] the repetitive selection of accounting
fearing curtailment to the use of pooling was the measurement or reporting rules in a particular pattern,
obligation under the purchase method to account the effect of which is to report a stream of income with
for goodwill and to take an earnings hit (albeit a smaller variation from trend than would otherwise
over a period of up to 20 years under the new have appeared". (Copeland, 1968)
proposals) . Under the FASB concession earnings
will be affected only if there is an impairment in Many research studies have tended towards the
the value of goodwill. Much therefore depends conclusion that creative accounting does exist
upon the de facto effectiveness of the impairment (e.g., Barnea et al., 1976; Dascher and Malcolm,
requirements, but, given that goodwill valuation 1970; Dempsey et al., 1993; McNichols and
is such a subjective and difficult area, it seems Wilson, 1988). However, there is also evidence to
likely that American corporations will be able to suggest that investors do not necessarily see through
use the requirement as quite an effective way to creative accounting (e.g., Healy and Wahlen,
manage their earnings. 1999, cite studies that find that creative accounting
The story behind the issuing of standards 141 and prior to equity issues does affect share prices). Also,
142 is interesting and instructive. It iUustrates the there is some evidence that even quite clear
intense poHtical nature of standards setting in the signalling can be misinterpreted or ignored even
USA (at one stage a biU was presented to Congress to by relatively sophisticated users (Breton and
place a moratorium on FASB's abiHty to eHminate Taffler, 1995). Furthermore, Dechow and Skinner
the pooHng method of accounting)5. In order to be (2000) argue that even if financial statements
able to introduce the standard eHminating pooling provide sufficient information to permit users to
FASB had to make a major concession by removing adjust for creative accounting, there would still be
the requirement to amortise goodwiU, thus creating cause for concern because certain categories of
an opportunity for some creative earnings manage investors have limited ability to process the infor
ment at the individual company level. It appears that mation available in the notes to the financial
the principal consequential outcome informing its statements.
action in this respect was the threat to its own sur Amat et al. (2003) report a study identifying a
vival as a standard setter. set of quite overt creative accounting practices in
some of the IBEX-35, stockmarket index which
includes the 35 largest listed companies in Spain.
Creative accounting in Spain: a case of The following occurrences were classified for the
micro-manipulation purposes of the study as possible indicators of
creative accounting (in that they alter the
As noted eariier in the paper, where strict appHcation impression presented to users by the financial
of the rules does not produce an accounting result statements):

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Some Ethical Issues of Macro- And Micro-Manipulation 61

TABLE I notably in the banking sector, may permit companies

IBEX-35 companies adopting practices indicative of to adopt an accounting policy that contravenes cur
creative accounting 1999?2001 rent accounting regulation. These authorisations are
provided as the result of successful lobbying by either
1999 2000 2001
a company or representative companies within an
% of IBEX-35 companies 40 45.7 25.7 industrial sector. Successful lobbying of this type
adopting one or illustrates the power and influence that preparers may
more of the three practices exert over regulators. It seems highly unlikely that
Number of companies 14 16 9 such power relationships will suddenly cease in 2005,
Reported earnings > adjusted 5 11 7 and we may expect that Spanish companies will
continue with their existing practices as far as it is
Reported earnings < adjusted 9 5 2
possible to do so. Because the international account
ing regulation is extremely weak in respect of
enforcement, any enforcement that exists will rely
Auditor report qualifications (in Spain, there is no upon the same national authorities that currently
requirement to restate the financial statements to permit relatively slack accounting disclosure in Spain.
reflect the effects of qualifications, although the
effect is noted in the auditor's report. This means
that the view given by the financial statements can Discussion
be, at least superficially, misleading).
Special authorisations from regulatory agencies to The two kind of behaviors discussed above illustrate
adopt non-standard accounting policies (this is a different manifestations of the power and influence of
peculiarity of the Spanish accounting environment) . preparers of financial statements.
Changes in accounting policy from one year to The first case illustrates the relative weakness of
another (these are relatively common in Spain. the U.S. standard setting body in dealing with a
The effects of such changes have to be quantified powerful pr?parer lobby. The contretemps over
and explained in the auditor's report). accounting for goodwill was not the first time that
the authority of FASB has been challenged but the
The impact of these factors was assessed for each of lobbying efforts that took place on this occasion
the three financial years in the 1999-2001 period. were perhaps the most serious challenge that has
The aggregate impact on earnings of these practices been made to the authority of a national standard
amounted to 20% of total reported earnings. Table I setter. The second case demonstrates that lobbying
summarises the findings against regulation can become institutionalised. It is
It may be noted that in 1999, a year when the also clear that some significant manipulation of the
economy was in a relatively buoyant condition, the appearance of major corporations' income state
reported earnings of nine firms were less than ad ments takes place in other ways too. Regulation
justed earnings. However, in 2000 and 2001 when in both cases becomes a negotiation between the
the Spanish economy was affected by an economic regulator and the pr?parer of financial statements.
downturn, the position was reversed. This result The interests of the users of the statements are likely
suggests the possibility that creative presentation of to be overlooked or ignored in such cases. The overt
results could be related to general economic condi manipulation robs the regulating body and the reg
tions (a possibility flagged by Merchant, 1990). ulatory process of respect and authority.
This study has some important implications for the User needs are ignored in the processes of manip
enforceability of international standards. Listed com ulation at both macro- and micro- level that we have
panies in Spain, in common with those in other analysed in the paper. The exercise of power of the
European countries, will shortly adopt international preparers is both unjust and unfair to the supposed
standards. It seems, however, that the peculiarly beneficiaries of the reporting process. The fundamental
Spanish approach to implementing accounting regu objective of financial statements is deemed to be the
lation will cease. Currently, supervising agencies, provision of useful information for decision-making,

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62 Catherine Gowthorpe and Oriol Amat

but it appears that accounting regulation is too com interpretation can be avoided. Some, possibly many,
promised to fulfil this purpose properly. preparers no doubt seek to interpret the regulation
Macro-manipulation is ethicaUy questionable, fairly and do not attempt to intervene in the regu
since preparers engage in lobbying to attempt to latory process. However, it is clear that some pre
prevent changes in regulations that they feel wiU be parers will adopt any means to hand to assert their
disadvantageous to them. Perhaps Httle would be own views. This can be seen as a misuse of the
wrong with this if their interests were not against the authority inherent in their position.
legitimate rights of those who are recipients of the It is generally accepted that power implies
financial information and wiU be taking decisions responsibility and injustice is nothing other than
based upon deceiving reports. It is generaUy accepted abuse of power, as was pointed out 25 centuries ago
that regulations have to be promulgated considering (Plato, 1992). Similar ideas of justice, according
the common good of the whole society and not only rights to each person or group, have been held by
the interests of a particular group. many other moral philosophers throughout history.
Regarding both macro and micro-manipulation, According to this conception of justice and others
several ethical considerations arise. First, the system of more recent, such as Rawls' well-known theory of
accounting regulation shares many features with a justice (1972), there is no doubt that the preparers of
system of law. We can look to values and ideas financial statements who misuse the authority
emanating from legal systems and systems of justice. inherent in their position are committing injustices.
Because, such systems are societal constructs we can Empirical perceptions support these notions of
look behind them to fundamental moral values such justice. Fischer and Rosenzweig (1995) found
as truthfulness. Lyons (1984) discusses the values that accounting and MBA students to be critical of
are exemplified in legal processes, and identifies manipulated transactions and the abuse of account
respect for the law as an important ethical element. ing rules. Merchant and Rockness (1994) found that
"For example, weU-designed procedures might accountants were critical of such abuses, and Naser
encourage respect for law, and thus obedience to law, and Pendlebury (1992) discovered similar disap
which many believe is a good thing" (p. 196). It may proval amongst U.K. auditors.
be argued that regulations that can be easily flouted, Moving from the general conceptions of injustice
perhaps because they have been poorly drafted, or and unfairness, we can proceed to a more personal
because enforcement mechanisms are inadequate, do level where individuals make business decisions that
not command respect. Lyons is discussing the rule of may be more or less defensible. However, business
law, but the point applies perhaps with even more life and decisions are not exempt from considerations
force to non-statutory regulation such as accounting of morality. As Solomon (1993) points out: "We can
regulation. If it fails to command respect from those no longer accept the amoral idea that 'business is
who are caUed upon to apply it, then regulatory business' (not really a tautology but an excuse for
failure is likely to ensue. In the context of the macro being an unfeeling bastard)" (p. 206). Any decisions
and micro-manipulation of financial statements that to lobby from a partisan point of view, or to dress
we have identified as problematic in the existing up financial statements, are made by a group of
system of accounting regulation, regulation loses individuals who are themselves moral agents. An
authority if it is open to manipulation by a powerful Aristotelian approach to business ethics requires
interested party and if it cannot, in any case, be virtue and good character in the individual.
enforced. It is helpful to bear in mind the idea of individual
Second, accounting regulators, as we have seen, responsibility for wrong actions, and the notion of
intend that financial statements should be useful to a good character when examining the rather amoral
wide range of users. The preparers of those financial arguments employed to excuse accounting manip
statements act as intermediaries between the regu ulative behaviour. A defence of creative accounting
lators and the users of the statements. They therefore behaviour can be made which rests upon agency and
occupy a powerful position as interpreters of the positive accounting theories. Revsine (1991) dis
regulations, and, given the complexity of the busi cusses the "selective financial misrepresentation
ness world, it is hard to see how some degree of hypothesis". He considers the problem in relation to

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Some Ethical Issues of Macro- And Micro-Manipulation 63

both managers and shareholders, and argues that reprehensible. They are not fair to users, they in
each can draw benefits from loosely drafted volve an unjust exercise of power, and they tend to
accounting standards that permit latitude in deter weaken the authority of the regulators. Where reg
mining the timing of income. Shareholders can ulation is breached with impunity a diminution of
benefit from the fact that managers are able to respect for it and its procedures is likely to ensue.
manipulate earnings to 'smooth' income since this
may decrease the apparent volatility of earnings and
so increase the value of their shares. The fact that this Notes
involves deliberate manipulation and deceit is to be
overlooked. Shareholders in this view become The predecessor body, the IASC, issued 41 standards
unwitting accessories to manipulation, but the over a period of almost thirty years. So far, the IASB has
agency theoretical supposition is that such behaviour issued (at the time of writing) two IFRSs.
is inevitable given the conflict inherent in agency 2 In the case of Australia, the Australian Financial
relationships. Reporting Council (FRC) announced on July the 3rd
Fundamentally, however, it is reasonable to of 2002 that it would recommend that from January the

question the validity of activities involved in dressing 1st of 2005 the accounting standards applicable to
companies would be those issued by the IASB (FRC,
up financial statements to present an appearance that
2002). In New Zealand the Accounting Standards
is not fully justified by the underlying economic
Review Board has recommended to the government
activity. This type of micro-level creative account
that IFRSs should be adopted by entities in both the
ing is informed by an intention to deceive the public and private sectors from January the 1st of 2007,
recipients of financial statements, and can therefore with the option to adopt them as early as January the 1st
be regarded as morally reprehensible. of 2005 (ASRB, 2002).
Subsequent events in the new technology market
proved that several of these predicted consequences could
Conclusion occur without the assistance of FASB.
A proposal which would have ensured convergence
with the U.K's FRS 10 and the IASC's IAS 22.
This paper has identified some manipulative
behavior on the part of preparers of financial state A biU introduced by Representatives Dooley and Cox
in the 106th congress.
ments, taking into account some important ethical
A peculiarity shared by France.
concerns. To achieve this, we have tried to broad
In addition, a decision has been taken by the Spanish
out the usual definition of creativity in accounting
government to extend the application of international
examining two principal categories of behaviour by standards to non-listed companies. In order to effect this
the preparers of financial statements: macro-manip change the Spanish Instituto de Contabilidad y Auditoria de
ulation and micro-manipulation. Cuentas (ICAC, Spanish Institute of Accounting and
At the macro-manipulation level, some preparers Auditing) plans to issue a new Plan General de Contabilidad
of financial statements are willing to engage in (PGC, Spanish Accounting Plan) which wiU be adapted
lobbying in an attempt to sway accounting regulators to IFRSs.
to produce rules that are advantageous to the inter This provides an interesting example of an hybrid
ests of preparers. In doing so, they are likely to shift between macro- and micro-manipulation.
the attention of regulators away from the interests of
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