day 25 subjectivity 2009 psring vs - Dr.JamesGong Agenda...

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Subjectivity in Accounting Dr. James Gong
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Agenda Why subjectivity Earnings management Video time Ethics of accountants
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Why Subjectivity Allowed?  Faithful representation   FIFO vs. LIFO    Signaling   Shorter depreciation period signals adherence on  safety for airlines But may be opportunistically used
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Rule-based Standards Some say accounting rules allow for too much  judgment which creates opportunity for pushing  numbers one way or the other They argue more rules are needed to prevent  “cooking the books” Problems Impossible for rules to cover every possible  circumstance Always ways around rules Complexity (think Internal Revenue Code)
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Principal-based Standards No substitute for trained professional applying  knowledge and judgment to a situation Considers changing context and factors
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