Introduction
My first attempt of discussing the statement has focused predominantly on different accounting profit figures used by companies, such as gross profit, EBIT and EBITDA. Knowledge acquired during the module has changed my view of accounting towards a multi-paradigm science, one that broadens the scope of identifying acceptable measurement rules, and therefore broadens the concept of “true profit” (Peasnell, 1978).
Regulation
The extent to which accounting profit provides a true figure was in particular questioned after the global financial crisis, where the effectiveness of financial accounting and regulation was put under doubt (Deegan and Unerman, 2011).
Thus, Posner (1974) argues that “the original purposes of the regulatory program are thwarted through the efforts of the interest group”, a perspective modelled by the capture theory. An example of an organisation that has ultimately gained control of the US authorities due to a common interest in oil is BP, whose regulatory capture has led to the worst oil spill in the US history (Marlowe, 2010). This stresses the manipulation of accounting practices to create profits that serve a specific interest group. Stigler’s (1971) economic interest theory emphasises the role of the government in controlling regulation in the interest of re-election, also compromising the reliability of true profit.
The degree to which accounting figures show a ‘true and fair’ value is influenced by lobbying, a process whereby different groups lobby regulators into adopting specific accounting approaches that benefit their own interest (Deegan and Unerman, 2011). Hope and Gray (1982) explain how aerospace companies have lobbied in favour of treating development expenditure as a form of capital expenditure and charging it as an expense in future years, a process that resulted in higher net assets.
Therefore, the issue of “true” accounting figures arises even before regulation is set in the market.
International Accounting
The use of FASB in the U.S.A. and IASB internationally resulted in different profit figures for companies. This is supported by Nobes and Parker’s (2010) finding that the profit figures for the Anglo-Swedish drug company AstraZeneca sums up to £9,521 million under the IASB approach and £29,707 under the FASB approach.
Consequently, standardisation of accounting by narrowing the set of rules has been recognised as a solution, which would increase comparability between different countries and facilitate greater flexibility and efficiency in the use of accountants by multinational firms (Nobes and Parker, 2010). The effectiveness of such an approach can be however questioned by Gray’s accounting values, which imply that the value systems of accountants in each country will be derived from the societal values of that country i.e. professionalism vs. statutory control, uniformity vs. flexibility, to name a few (Deegan and Unerman, 2011).
Systematic differences, such as taxation, provide another example of different figures obtained when using the same accounting practice. Differences in accounting figures occur when valuing asset impairments that are tax deductible in Germany, but not in the UK (Nobes, 2006).
As a result, two different regulatory bodies, cultural differences, different taxation systems and modifications to rules at a national level raise concerns of whether financial accounting can be neutral or objective (Hines, 1988, 1991).
History of Accounting
IASB’s decision to move from matching to an asset-liability approach implies that income for a period is calculated as the change in net assets (Anderson-Gough, 2015). Variations in the value of true profit occur when choosing between historical costs, current cost, modified historical costs, etc. Consequently, Edwards and Bell’s (1961) possibilities of valuation stress the variety of profit figures that can be obtained, and disagreements of whether each of these reflects a “true” and “simply” a profit figure.
Power’s (2010) view on fair value as an “effort to shift fundamentally the landscape of knowledge informing the financial accounting process” has had its criticisms as well, stating that exit values only make sense in particular circumstances. This compromises the aim of achieving “true” accounting profit.
Positive Accounting Theory
According to Watts and Zimmermann (1990), in an Efficient Market Hypothesis environment where accounting methods do not affect taxes, the resulting figures of accountants do not affect the value of the firm. This supports that accounting figures are “simply” a measure; however, it does not take into account the inefficiency of markets, and the concept of lobbying. An example are the profit figures reported by Millenium and Copthorne Hotels, that have increased shares by 11.3% to 42.7p (Allen, 2010).
Derived from the Positive Accounting Theory and consistent with objectivity, the “efficiency perspective” asserts the view that organisations are best served by choosing accounting methods that best reflect their underlying performance (Jensen and Meckling, 1976). The relative freedom by the IASB of choosing methods of measurement serves the needs of this perspective, however, it has been prevailed by the “opportunistic perspective”, where firms use these as a tool for profit manipulation as self-interest (Watts and Zimmermann, 1978). An example of creative accounting took place at Lehman Brothers, where a contentious technique known as “repo 105” temporarily boosted the bank’s balance sheet by £33bn (Clark, 2010). Self-interest as a threat to true accounting figures also occurs within the firm under the agency theory, where a manager may increase profit figures to the own interest of earning a higher salary (Lambert, 2001). On the other hand, the aim of large-scale firms to attract lower political attention would incentivise firms do deviate from true figures and use accounting policies to minimise profits. (Deegan and Unerman, 2011).