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: http://www.jstor.org/stable/25123453 . Accessed: 25/01/2011 06:07
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Journal of Business Ethics 57: 55?64, DOI 10.1007A10551-004-3822-5

2005.

2005 Springer

Creative Ethical

Some Accounting: Issues of Macroand

Micro-Manipulation

Catherine Gowthorpe Oriol Amat

ABSTRACT. position presented paper to

Preparers

of

financial view to of

statements economic

are

in

the manipulate statements in those two term of that principal

interested

examines The the

categories

behaviour. describe produce of

lobbying

regulation

'macro-manipulation' to regulators persuade to the favourable ismore describes to a biased produce of manipulation

parties. of manipulative is used

reality This

morally involve weaken

reprehensible. They an exercise unjust the authority of

are of

not

fair and

to users, they tend

power,

they to

accounting

regulators.

to to

KEY tion,

WOPJDS: creative

Accounting accounting,

ethics, earnings

accounting

regula financial

them interests the man view can

management, micro-manipulation

reporting,

macro-manipulation,

preparers.

"Micro-manipulation" figures categories at creativity two of

agement the entity

of accounting level. as Both

at be

viewed preparers. First,

attempts The paper

it describes

analyses a recent case the

statement by financial cases of manipulation. significant regulator recent the and in Spanish of creativity concludes regarded as successful the USA. earnings biased are

ABBREVIATIONS:

against lobbying case The second manipulation reporting considered that at the in an to

accounting some examines demonstrate entity ethical level. Both

ciples Board; ASFJ3, Financial Board; FASB, Board; IASB, International Board; IASC, de Committee; Auditor?a ICAC, Cuentas

Prin The Accounting Standards Review Accounting APB, Accounting Accounting Standards Standards

effects of

International

types The in

Standards Accounting de Contabilidad Instituto y (Spanish IFRS, Institute of International

context. described

paper be

the manipulations

it can

Accounting Auditing); Interna Financial Reporting Standards; IOSCO, tional Organization of Securities Commissions; PGC, Plan General Plan); SEC, de Contabilidad Securities Accounting Commission (Spanish and Exchange

and

Catherine

Gowthorpe

is a Research

Fellow

in Accounting some

at

Oxford Brookes University. She is the author and editor of

many books and articles on accounting, of them in the

field of ethics and accounting, including Ethical Issues in Accounting (Routledge, 1998). She has published injournals
such as Business Review, Journal Ethics: a European Business Review, Review European and The Accounting International European of Accounting.

Introduction Financial statements that is used provide information to assess the performance of parties

Oriol Amat
Department

is a Professor of Accounting and Chair of the

of Economics and Business at the Universit?t

Pompeu Fabra
Catalan Association

(Barcelona). He
of Accounting

is Vice-president of the
and Management (AC

CID) and member of the Spanish Association ofAccounting and Business Administration (AECA). He is the author and
editor published Review, Review, of several books and such Accounting Management articles as Business Review, Journal on' in journals European European accounting. a Ethics: European and The He has European Business Interna

by and to make economic decisions. Users managers assume that the financial information may they re ceive is reliable and fit for its purpose. Accounting regulation produced set of rules that make communications may be to ensure that information attempts on a consistent basis in accordance with it reliable for users. However, between entities and shareholders distorted by the activities

interested

is a

tionaljournal

of Accounting.

deliberately

of

56 Catherine financial content of

Gowthorpe

and Oriol Amat

United States. The some recent

statement preparers who wish to alter the transmitted. This type of the messages being to as "creative distortion is often referred
or "earnings management". While

second

examines

evidence statements discussion

from

of financial Spain on the manipulation that takes place at the entity level. The to consideration of ethical

accounting"

then moves

the acceptability of accounting manip opinions as reprehensible. ulation vary, it is often perceived some manipulative This paper aims to identify the part of preparers of financial state some important ethical ments, taking into account concerns. To achieve this, we will broaden out the behavior usual examine creativity accounting two principal of behaviour categories statements the preparers of financial
When become

on

issues of respect, fairness, justice and personal morality.

on

The

accounting

regulatory

background

Accounting

definition

of

in

to by

is regulated in most countries by two means: first, local laws relating to corporate principal and other bodies, and second, a system of accounting in the form of standards. These are often regulation promulgated by non-governmental
Also, in recent years,

? Macro-manipulation.

organisations
a supra-na

preparers

and

foundations.

aware of a proposal to alter accounting regulation to in a way that they feel will be disadvantageous them, they may engage in lobbying to attempt to prevent the change. They attempt to bring about an alternative depiction of economic reality which to them. In this paper we is more favourable identify
ulation. Micro-manipulation. Creative accounting at an

tional body, Committee

setting via an agreement by several leading national pro bodies. In the period between fessional accountancy 1973 and 2001

Standards Accounting more in (IASC) has become important standards. The IASC came into being in 1973

the International

this type of behaviour

as macro-manip

it grew in status, authority and was poised to become the By 2001 it membership. of de facto supra-national standard setter for much A key point was gained with the agree in 1995, with the International Organization ment, of Securities Commissions that the IASC (IOSCO), the world. would a set of "core be responsible for developing If these were standards". agreed by IOSCO they would be endorsed for use in aU global markets. This took place in 2000. In 2000, the IASC endorsement to alter its constitution: the from 2001 decided as the was reconstituted standard setting body Standards Board International Accounting (IASB), to be responsible Financial for issuing International Standards (IFRS). The IASB is currently Reporting some highly in the process of addressing complex technical issues that wiU, of further in due course, result in the publication In 2001 decision adoption IFRS.

individual
ing accounting

entity

level
disclosures

involves
so as

preparers
to create

in alter
the view

of reality that they wish users of the financial behaviour

manipulation.

to have

communicated This

to

statements.

is described

in this paper

type of as micro

In both
financial

cases, preparers
statements to

are interested
suit their

in creating
own purposes.

the of

Of

genuinely from all points of reality is preferable view. However, it is also possible that they seek to own needs or de their distort the picture to meet some sig sires. This paper identifies and discusses ethical issues related to these manipulations of accounting reality. The paper proceeds as follows: first, the principal features of the current accounting regulatory landscape are described. The purpose of regulation, and the statements are explained, and of financial objective then the paper goes on to discuss the ways in which statements may confound the preparers of financial then consider two intentions of the regulators. We
cases of manipulation. The first concerns a case of

course, economic

they may

feel that their view

nificant

Commission took the the European to present that required the legislation standards by the listed of international

states from 2005 onwards. of aUmember companies Similar arrangements wiU shortly come into operation inAustralia and New Zealand. It can be expected that several national world
even

setting bodies around the wiU graduaUy become less important, and may standard
to cease exist. However, a national

eventuaUy

lobbying

over

a significant

accounting

issue

in the

standard setter that is likely to exist into the foreseeable Standards Board future is the Financial Accounting

Some Ethical in the USA. Until

Issues ofMacro- And Micro-Manipulation down

some as we

57 the operations
However, in accounting there regulation,

recently, it appeared quite standard setting might that U.S. proceed possible without much regard to the activities autonomously a convergence of the IASB. However, project has been launched and it is likely that there will be some (FASB)
significant next few movement years. towards convergence over the

the barriers
capital structural aim to

that hamper
markets.

of the
are

international

weaknesses show here.

The This

purpose paper

of accounting is based

regulation

The

"infrastructure offinancial

reporting" four elements of financial as forming reporting": for identifying

expertise, standards set

that in part upon the proposition an important function in accounting regulation has It affects the allocation of economic resources, society.

(2000) identifies Schipper of "the infrastructure part 1. The

2. The

effects upon and so it has potentially wide-ranging and the balance of economic social welfare power interests. Prior between parties with often competing to the 1970s accounting regulatory bodies were not much the consequential concerned with generally effects of their actions on such matters as distribution and economic
onwards,

effectiveness

of mechanisms

and resolving
structure, and incentives ting

interpretative
processes, resource base

questions.
of the

independence,

well-being.
impact

However,
issues were

from the 1970s

recognised as

economic

organisation,

3. Auditing and auditors. 4. Enforcement of accounting supporting

In many

standards

and

the

For example, Zeff increasing importance. recounts several instances of behaviour on the (1978) part of lobbyists that made the Accounting Principles being of Board of the States (the predecessor (FASB)) increasingly aware of the impact of its identifies actions. He several factors leading to the current
recognition of economic consequences as an issue of

regulations.
systems, one or more of these

in the United

national

elements
example,

can be found
U.K. accounting

to be

relatively
was

weak
relatively

(for until reg

regulation

weak

in respect of the first and second elements the early 1990s when the national accounting
system was overhauled).

primary

importance,

including

the following: institu

ulatory

A general societal trend towards holding tions accountable for their actions; The sheer scale of the potential regulation;
awareness of the information

international accounting Although regulation can claim to possess the first two of Schipper's (2000) four in respect of enforcement it is vulnerable elements, mechanisms and in respect of auditing and auditors. The IASB has to rely upon national systems and these are likely to be patchy and inconsistent. Fearnley and (2001)
prevalent

economic

impact
eco

of accounting
Increasing

nomics The

and social choice

literature.

Macve
nesses

identify

some of the principal

systems of

weak

in national

compliance:

weak tive

support mechanisms sanctions against the

for auditors, lack of effec and differences directors,

awareness of economic growing impact issues in the last informed the debate that took place 30 years or so of the 20th century about the estab lishment of a conceptual for accounting. framework impetus for the establishment started in the U.S.A. framework serious work was done on this frameworks of a conceptual the first where

The

between (2001),

and practice. Cairns legal framework the findings of his International summarising Standards

in 2000, Survey published Accounting notes a substantial level of non-compliance with international standards amongst companies claiming to adopt them. Current developments are proceeding convergence are welcomed rapidly, and even in many in accounting and the movements regulation towards

type of project. have subsequently However, conceptual been promulgated in Aus elsewhere (for example, tralia and the United and at an interna Kingdom tional level by the (IASC)). The frameworks define the fundamental specify interest estabhsh of financial statements, purpose to take an the parties who have a right in the products of financial and reporting definitions of the key elements of financial

international standardisation to break quarters as helping

58 Catherine

Gowthorpe

and Oriol Amat not ethical (this is a significant always predictable in its own right that wiU be the subject of a problem and the separate paper). Another problem, however, is that when one with which this paper is concerned, incentives the stakes are high there are considerable for financial work statement preparers to confound the of the regulators. are two principal of

such as assets and liabilities. The objec accounting, as follows in statements is defined tive of financial Financial
"The

the Framework for the Preparation and Presentation of Statements published by the IASC in 1989:
objective about of financial the financial position of users statements position, of an is to provide

information and

in financial changes to a wide useful range

performance that enterprise economic

is

in making

decisions"

(paragraph 12).

in the form of accounting Accounting regulation, is stated is based upon this objective which standards, to broadly defined in terms of utility in groups user It is worth too, that the observing, society. groups described
other sive conceptual in nature,

in the Framework
framework covering

statement
are

(and the
exten lend

means the by which the regulators can be confounded by First, preparers may preparers. lobby against pro an adverse effect upon posals for rules that wiU have statements prepared by their entities. the financial strict appHcation of the rules does not Second, where an accounting the needs of result that meets produce or to an incentive to misapply there is preparers, There intentions ignore where but the rule. This condition and/or regulation involve manipulation, Both of these means and the level of policy, is at the macro the first at the micro
term "creative

statements) investors, employees,

is weak

can pertain only is inadequately

and the final ers, suppliers, customers, governments catch-all of the public. However, priority is awarded to the information needs of investors as the providers of risk capital
So, in

enforced. second
The

level of the business

accounting" is

entity.
ap

to business.
financial statements are geared

generaUy

summary,

types decision-making by various different of user, but the user group of most importance investors. Accounting consists of the risk-taking towards regulators particular, consequences are attuned and to the needs are concerned of this group in the economic with

that takes place at plied to the type of manipulation we the level of individual business entity. However,
characterise both the macroand micro-activities as

of the standards

that they promulgate.

in both manifestations creative processes: preparers are busily engaged in managing financial accounting to their own ends. In both cases preparers disclosures assert the primacy of their own views of the world and seek to dominate their partisan version In order to iUustrate the nature of the problems so far, the next two sections of the paper identified detailed examples of accounting manipula provide reporting of the truth. the process with

Confounding regulators As Zeff (1978)

their

policies:

preparers

vs.

observed,
is the

an

important
scale of

factor
the eco

in

tion.

The

first

examines

a case

of

recent

successful

accounting

regulation

sheer

macro-manipulation highly significant accounting

in the United

States where the principal by successful

nomic

rules. The choice impact of accounting rule may have a very significant impact accounting level of on, for example, reported profits. The affects of a commercial entity potentially profitability distributions

of an

by policy decision was confounded regulator

to owners, wage and salary negotia levels of pensions funding, ability to borrow or tions, to raise further risk capital, taxes paid and so on. The in the context of major stakes are high, especially
or multi-national corporations whose

pr?parer lobbying. at the The second case looks at micro-rnanipulation exam individual accounts level. The case selected for ination overt manipulation Goodwill
macro-manipulation

as wiU be seen, quite is that of Spain, where, of earnings figures takes place. accounting in the USA: a case of

national

activities many
economic

have

consequential Regulators may

of

effects
their

on

the lives of to take the

into ac

people.

attempt
actions

consequences

count,
ways.

but they are likely to be confounded

For one thing, the consequences of

in many
actions are

In July 2001 FASB, the U.S. accounting regulator, no 141 issued two new standards: FAS Statement no 142 Business combinations and FAS Statement

Some Ethical Goodwill

Issues ofMacro- And Micro-Manipulation

59

and other intangible assets. FASB had devoted a great deal of time over a five year period to its project on business combinations. The principal concern was

to a proposal which was eventually pletely outlawed, et al. form a significant part of SFAS 141. Ayers before the issue of the standard itself, (2000), writing had based estimated, transactions accounted that the elimination accounting
consequences

the status of pooling of interests (merger) accounting. area of accounting, but This is a relatively complex of interests generally suffice it to note that pooling statements that show the com combined produces in much better light than under the alter bination accounting. acquisition Accounting Principles Board (APB), the predecessor as early as 1968 body to FASB, had discussed the issue a view to eliminating the use of the pooling with method The initial for combinations. of accounting had been a preliminary result of the deliberations to eliminate the pooling method recommendation native method of The

examination of many upon for by the pooling method, in U.S. of the pooling method have
for

would
in that,

significant
earnings

economic
per share

example,

deteriorate. and return on equity would results from The worsening of key ratios which no via the purchase method recording combinations to do with corporate America's to accept the elimination of the pooling Cisco method. The technology company (2000), a pro significant lobbyist against FASB's proposals, doubt had much reluctance vided could the following list of dire consequences3 follow FASB's standard: of innovation and investment which

altogether, but the APB was persuaded to retreat from to Zeff (1978) the this hard line position. According APB appeared "almost as a pawn in a game of political chess.. .as it abandoned positions of principle in favor
of an embarrassing series of pressure-induced com

Impeding

in new

promises" established before

Statement No (p. 59). APB a set of 12 restrictive criteria

16 instead to be met

technologies. Slowing of overall

companies.

economic

growth

of high-tech

the pooling method could be adopted. Al 16 restricted the use of though APB Statement No the pooling method, according to Ayers et al. (2000),
subsequent research suggested that "... managers

Significant
activity.

reduction shareholder

in merger value

and acquisition reduc

Impact
tion in

on

and artificial

corporate

earnings.

to incur and are willing prefer this accounting method costs to avoid the recognition of additional significant assets and expenses the purchase associated with method" 2). (p. has been heavily used: one recent esti Pooling mate is that in 1998 around of 55% of new business (out of a total of 11,400 transactions) were for under the pooling method accounted et al., 2000). FASB's concerns about the issue (Ayers included the following: combinations The issue of comparability between groups of

Reduction companies established One where most of the

in the number able

to develop

of small enterpreneurial or compete with

companies. technical issues that arises accounting is carried out is that, in accounting the between there is a difference

acquisition

acquisitions, price paid for the business and the value of the net assets acquired. This difference is known as goodwill, and accounting standard setters
as an asset

for it has occupied the minds of If it is and preparers for decades.

and amortised, it can have a sig

treated

companies.

nificant
alternative

effect

in depressing
treatment

reported
involves

profits.

An

The heavy utilisation of regulatory resources upon the results of this method of accounting (FASB time" and SEC staff were spending "considerable interpreting the pooling The financial statements produced under is method). substance underlying

accounting

treating

as an asset, but not subjecting goodwill amortisation. Instead, the asset would tested for so-called

it to regular be regularly

that is, tested to see "impairment", can be proved that it if its value has reduced. Only if it

of genuine

pooling

rarely encountered FASB issued therefore in 1999,

in practice. an exposure method be draft com

has lost value, would there be any effect on profit. to reduce FASB proposed the maxi Initially, mum amortisation of for acceptable period from 40 to 20 years goodwill that many businesses would (which would mean to set higher have

via proposed, that the pooling

60 Catherine Gowthorpe amounts reducing of amortisation against their profits, and earnings thus

and Oriol Amat of preparers, there is an or to ignore the rule. Creative incentive to misapply as income (also known accounting smoothing, the needs
earnings management, cosmetic accounting or

that meets

per reported earnings to relate, during the course of share). Strange and hearings discussions FASB's view changed, to take a non-amortisation and the Board decided to goodwill. approach the chairman reported change in neutral In FASB's this highly "Rather against annual report

financial
".. .the

engineering)
deliberate of

has been
dampening considered 1976) part and to be the

variously
of

defined

as

fluctuations to be normal

about for the

terms:

significant than have

some firm".

level

off goodwill write companies for up to 20 years as originally analysis we concluded thorough more ment" This was to appropriate (Financial clearly its critics. One to test Accounting a politically

earning et al., (Barnea action on the

earnings after proposed, it would be that

".. fects

.any

of management which provides

which no and may, (Merchant

af true in and

for impair goodwill Foundation, 2000). motivated concession

reported economic advantage in the long-term, fact,

income

organization

detrimental".

Rockness,

1994)
the or repetitive rules of accounting in a particular pattern, a stream of income with than would otherwise selection

reasons of the principal for to the use of pooling was the fearing curtailment to account under the purchase method obligation for goodwill and to take an earnings hit (albeit a period of up to 20 years under . Under the FASB concession proposals) will be affected the value upon only if there of goodwill. Much the de facto effectiveness therefore over the new earnings is an impairment in

".. .[involving] measurement the effect

of which variation

reporting is to report from

a smaller

trend

have appeared".

(Copeland,

1968) towards does the exist

but, given requirements, is such a subjective and likely that American use the requirement
manage their earnings.

depends of the impairment that goodwill valuation difficult area, it seems will be able to way to

research studies have tended Many that creative conclusion accounting

corporations as quite an effective

et al., 1976; Dascher and Malcolm, (e.g., Barnea et al., and McNichols 1970; Dempsey 1993; to is also evidence there Wilson, 1988). However, see through suggest that investors do not necessarily creative 1999, cite and Wahlen, accounting (e.g., Healy studies that find that creative accounting

The 142 USA intense

story behind

is interesting

the issuing of standards 141 and and instructive. It iUustrates the

place the pooHng method

poHtical nature of standards setting in the to to Congress (at one stage a biU was presented on FASB's abiHty to eHminate a moratorium

In order to be of accounting)5. the standard eHminating pooling able to introduce FASB had to make amajor concession by removing
the an requirement opportunity to for amortise some goodwiU, creative thus earnings creating manage

prior to equity issues does affect share prices). Also, there is some evidence clear that even quite can be misinterpreted or ignored even signalling users and (Breton by relatively sophisticated Dechow and Skinner Taffler, 1995). Furthermore, statements if financial that even argue (2000) provide
cause for

sufficient
concern

information accounting,
because

adjust for creative investors mation

statements.

to permit users to still be there would

certain categories of

have

limited in

ment

at the individual

the principal action in this respect was

vival as a standard setter.

company level. outcome consequential

It appears that its informing sur

available

the infor ability to process to the financial the notes a in

the threat to its own

et al. (2003) report a study Amat set of quite overt creative accounting some of the IBEX-35, stockmarket includes the 35 The

identifying practices index which

Creative

accounting

in Spain:

a case

of

micro-manipulation

purposes creative

following of the

in Spain. largest listed companies were occurrences classified for the study as possible indicators that alter (in they to users by the of the

accounting presented

As noted

strict appHcation eariier in the paper, where an accounting of the rules does not produce result

impression
statements):

financial

Some Ethical TABLE

IBEX-35 companies creative adopting accounting

Issues ofMacro- And Micro-Manipulation notably in the banking

an accounting regulation.

61

I
practices 1999?2001 indicative of

sector, may
policy These that

permit

companies
cur are

to rent

adopt

contravenes authorisations

accounting

1999 % of IBEX-35
adopting more of one the or three practices

2000 45.7

2001 25.7

provided
a company

as the result of successful

or representative

lobbying

by either
within an

companies

companies

40

Number

14 of companies > earnings adjusted Reported

earnings

5 9 2

16 7 11 5

sector. Successful lobbying of this type illustrates the power and influence that preparers may exert over regulators. It seems highly unlikely that such power relationships will suddenly cease in 2005, industrial and we continue possible that Spanish companies will expect their existing practices as far as it is to do so. Because the international account may with

Reported
earnings

earnings

<

adjusted

Auditor
requirement

report qualifications
to restate the

(in Spain,
financial

there is no
to

statements

is extremely in respect of weak ing regulation that exists will enforcement, any enforcement rely the same national authorities that currently upon permit relatively slack accounting disclosure in Spain.

reflect effect

the effects is noted

the of qualifications, although in the auditor's report. This means statements can to Discussion The two kind of behaviors
of

that the view

given by the financial

be, at least superficially, misleading). Special authorisations from regulatory non-standard

agencies

discussed

above

illustrate of of a

(this is a accounting policies adopt . peculiarity of the Spanish accounting environment) in accounting policy from one year to Changes are relatively common in Spain. another (these The effects of such changes have to be quantified in the auditor's report). and explained

different manifestations
preparers financial

of the power
statements.

and influence

The the U.S. powerful

first

case

illustrates setting

the relative weakness body in dealing with

standard

The

impact of these factors was assessed for each of the three financial years in the 1999-2001 period. The aggregate impact on earnings of these practices amounted It may economy reported to 20% of total reported summarises the findings earnings. Table I

over pr?parer contretemps lobby. The for goodwill was not the first time that accounting the authority of FASB has been challenged but the efforts that took place on this occasion lobbying that has standard

were

the most serious challenge perhaps to the authority of a national been made setter. The second case demonstrates can become against regulation also clear that some significant
appearance of major corporations'

that lobbying It is institutionalised. of the

state income

be noted that in 1999, a year when the was in a relatively buoyant condition, the less than ad earnings of nine firms were in 2000 affected
was

manipulation

ments

justed earnings. However, the Spanish economy was

downturn, the position

and 2001 when by an economic

This result

too. Regulation takes place in other ways a negotiation in both cases becomes between the
and the pr?parer of financial statements.

regulator

reversed.

of that creative presentation suggests the possibility condi results could be related to general economic tions (a possibility flagged by Merchant, 1990). This study has some important implications for the of international enforceability in Spain, in common panies European standards. will standards. Listed with those com in other

interests of the users of the statements are likely or ignored in such cases. The overt robs the regulating body and the reg manipulation The to be overlooked ulatory User ulation analysed process of respect and authority. needs are ignored in the processes of manip at both macroand microlevel that we have

countries, shortly adopt It seems, however, that the peculiarly to implementing regu Spanish approach accounting cease. Currently, lation will supervising agencies,

international

in the paper. The exercise of power of the preparers is both unjust and unfair to the supposed beneficiaries of the reporting process. The fundamental objective provision of financial of useful statements information is deemed to be the for decision-making,

62 Catherine it appears that accounting promised to fulfil this purpose Macro-manipulation since preparers engage prevent wrong changes is but

Gowthorpe

and Oriol Amat can be avoided. Some, possibly many, interpretation no doubt seek to interpret the preparers regulation in the regu fairly and do not attempt to intervene
latory process. However, it is clear that some pre

regulation properly. ethicaUy

is too com

disadvantageous with this if their interests were of those who and wiU

questionable, in lobbying to attempt to in regulations that they feel wiU be to them. Perhaps Httle would be not against the are recipients of the be taking decisions

to hand to assert their parers will adopt any means own views. This can be seen as a misuse of the authority inherent It is generally and responsibility in their position. that accepted

legitimate rights financial information

based upon deceiving that regulations have

the common good the interests of a particular both macro

reports. It is generaUy accepted to be promulgated considering of the whole society and not only

power implies is nothing other than injustice abuse of power, as was pointed out 25 centuries ago ideas of justice, (Plato, 1992). Similar according to each person or group, have been held by rights many
more

group. and micro-manipulation, Regarding several ethical considerations arise. First, the system of a shares many features with regulation can look to values and ideas law. We from
such

other moral

According
recent,

philosophers to this conception

such as Rawls'

throughout history. of justice and others

theory of

well-known

accounting system of emanating

Because,

justice (1972), statements financial inherent

there is no doubt who

that the preparers of misuse the authority injustices. notions of

legal systems and systems of justice.

systems are societal constructs we can

in their position

look behind

them

to fundamental

moral

values

such

Empirical perceptions Fischer and Rosenzweig justice. accounting

manipulated

are committing support these

as truthfulness. Lyons (1984) discusses the values that are exemplified in legal processes, and identifies for the law as an important ethical element. respect "For example, weU-designed procedures might to law, encourage respect for law, and thus obedience which many believe is a good thing" (p. 196). Itmay be argued that regulations that can be easily flouted, perhaps
because

and MBA
transactions

students
and the

found (1995) to be critical of

abuse of account

ing rules. Merchant accountants were and

proval

and Rockness critical (1992)

(1994) found that of such abuses, and Naser discovered similar disap

Pendlebury
amongst U.K.

auditors.

Moving
and unfairness,

from
we

the general
can proceed

conceptions
to a more

of injustice
personal

because
enforcement

they have
mechanisms

been

poorly
are

drafted,

or
do

inadequate,

level where may

life and

not command law, but

force

respect. Lyons is discussing the point applies perhaps with

regulation such as

the rule of even more

accounting

individuals make business decisions that business be more or less defensible. However,
decisions are not exempt from considerations

to non-statutory

respect from those regulation. are caUed upon to apply it, then regulatory who failure is likely to ensue. In the context of the macro we statements that and micro-manipulation of financial as problematic in the existing have identified loses system of accounting regulation, regulation a powerful authority if it is open to manipulation by interested
enforced. Second, accounting regulators, as we have seen,

If it fails to command

(1993) points out: "We can the amoral idea that 'business is accept business' (not really a tautology but an excuse for bastard)" (p. 206). Any decisions being an unfeeling to lobby from a partisan point of view, or to dress are made statements, up financial by a group of of morality. no longer As Solomon individuals Aristotelian virtue who are themselves moral to business approach and good character in the individual. It is helpful to bear in mind the idea of individual and the notion the rather
accounting

agents. An ethics requires

party

and

if it cannot,

in any

case,

be

intend wide
statements

that financial
act as

statements

should be useful
between the

to a

for wrong actions, responsibility examining good character when

arguments employed to excuse

of

amoral
manip

range of users. The

preparers

of those financial
regu

intermediaries

ulative

lators and the users of the statements. They therefore a powerful as interpreters of the occupy position of the busi and, given the complexity regulations, some degree of ness world, it is hard to see how

behaviour. A defence can be made which behaviour

of creative rests upon Revsine

accounting agency and (1991) dis to

positive cusses

theories. accounting the "selective financial He considers

hypothesis".

misrepresentation in relation the problem

Some Ethical both each and shareholders, managers can draw from benefits standards the from that permit of income. and

Issues ofMacro- And Micro-Manipulation

63

argues that drafted loosely in deter can

accounting mining benefit

latitude

timing the fact

Shareholders

are not fair to users, they in reprehensible. They volve an unjust exercise of power, and they tend to weaken the authority of the regulators. Where reg a diminution is breached with ulation of impunity respect for it and its procedures is likely to ensue.

earnings manipulate may decrease the apparent volatility of earnings and so increase the value of their shares. The fact that this involves deliberate overlooked. unwitting agency is inevitable manipulation in Shareholders and deceit this view is to be become

are able to that managers to 'smooth' income since this

Notes The
over a

predecessor
period of

body,

the IASC,
thirty years.

issued 41 standards
So far, the IASB has

accessories theoretical given

to manipulation, the but is that such behaviour supposition the conflict inherent in agency

almost

issued (at the time of writing) 2

In the case of Australia,

two IFRSs.
the Australian Financial

relationships. to it is reasonable however, Fundamentally, the validity of activities involved in dressing question up financial statements to present an appearance that is not fully justified by the underlying economic This type of micro-level creative account activity. to deceive the ing is informed by an intention recipients of financial be regarded as morally statements, and can therefore reprehensible.

Council (FRC) announced on July the 3rd Reporting of 2002 that itwould recommend that from January the
1st of 2005 the accounting standards applicable to

companies would In New 2002).

Review Board has

be those Zealand

issued by the IASB (FRC, the Accounting Standards

to the government

recommended

that IFRSs should be adopted by entities

public with and the private to sectors adopt from them option January as early the as

in both
1st of the

the
1st

2007,

January

of 2005

(ASRB, 2002).
events several the which of in these the new technology market could that consequences predicted of FASB. have ensured

Subsequent proved occur without A proposal

Conclusion This has identified some

assistance would

convergence

the part of preparers some important ethical ments, taking into account concerns. To achieve we have tried to broad this, out the usual definition in accounting of creativity examining
the preparers ulation At

paper behavior on

manipulative state of financial

with the U.K's FRS 10 and the IASC's IAS 22. A biU introduced by Representatives Dooley and Cox
in the A 106th congress. shared a decision to extend by France. has the been taken by the Spanish of international to effect this peculiarity In addition,

two principal
of financial

categories
statements:

of behaviour
macro-manip

government standards

by

to non-listed

companies.

application In order

change the Spanish Instituto de Contabilidad y Auditoria de

Cuentas (ICAC, Spanish Institute of Accounting and

and micro-manipulation. the macro-manipulation level, some preparers

of
to

financial

statements

lobbying
produce

in an attempt
rules that

are willing to to sway accounting

advantageous to

engage
the inter

in

regulators

Auditing) plans to issue a new Plan General de Contabilidad (PGC, Spanish Accounting Plan) which wiU be adapted to IFRSs.
This between provides macroan interesting example and micro-manipulation. of an hybrid

are

ests of preparers. In doing so, they are likely to shift the attention of regulators away from the interests of users of the financial statements. At engage present Both the micro-manipulation level, some preparers in manipulation at their entities in order to a biased view of economic that may of behaviour reality. are likely to result in suit the purposes of the

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