Question

Accounting rules allow firm managers to exert some levels of discretion in choosing their accounting methods, policies and estimates. Do you think that such discretion is unnecessary?

Answer 1

ANSWER: In my opinion the account discretion to a certain level is necessary. Although in most of the cases the explicit abuses are often the result of accounting discretion due to earnings-linked bonus plans, thus the management often abuse accounting discretion to maintain or expansion of the private control rights, hiding the true performance and preventing the outside monitoring. However it can also cause a positive association among the accounting discretion attributable to governance quality and the subsequent performance indicates that shareholders gains from earnings management because it signals a positive performance in future. Thus when used by management in a consistent approach with efficient contracting it results to the value-maximization for shareholder as well as employees.