Conflicts With GAAP

My Discussion :

Even though firms follow the accounting  rules (GAAP) when presenting their financial statements, it is still  possible for conflicts of interest to exist between what management  wants investors and creditors to see and the economic reality of  transactions. Explain how this can occur.

Respond to at least two of your classmates’ posts.

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Reply to Remmie:

Even  though firms follow the accounting rules (GAAP) when presenting their  financial statements, it is still possible for conflicts of interest to  exist between what management wants investors and creditors to see and  the economic reality of transactions. Explain how this can occur.

The façade that organizations used to deceive investors and creditors  known as “creative accounting” and former SEC Chairman Arthur Levitt  coined several terms that we will use though out this post “accounting  hocus-pocus” to describe this technique; an organization can “cleanup”  its balance sheet by washing away past financial problems, when returns  drop considerably, and executives don’t want the company to be seen  financially unstable, negative items on the balance sheet would be drop  and masked as other favorable items of change. (Epstein, L. 2014)
“Cleaning”  process may all so include hiding previous financial reporting problem,  intentionally or non-intentional accounting errors reported in the past  period. By including this misstep as part of the restructuring, the  company now hopes to cover past errors as part of a said larger change.  “Merger magic” hiding previous reporting problems as part of the merger,  hoping that passed inaccuracies would be missed. (Epstein, L. 2014)  There are numbers of other ways “creative account” can poke it ugly head  up which includes the “miscellaneous cookie jar”, “revenue  recognition”, “exploitation of expense”, “recognizing overstated  assets”, “undervalued liabilities.” These are some of the creative ways  organizations masked financial improprieties. (Epstein, L. 2014)

Epstein, L. (2014). Financial decision making: An introduction to  financial reports [Electronic version]. Retrieved from

Reply to Edward:


Conflicts occur through management and investors when managers  have to find ways to keep shareholders happy and from leaving the  company. The Gaap requirements only consist of following general  accounting principles and guidelines along with standards put in place  by the financial accounts standing board. While these guidelines show  that a company is honest in regards to displaying their financial  statistics, they do not provide enough vital information to investors  and shareholders. Shareholders want information that will provide a more  in-depth performance of a company that will help give a future  forecast.

To prevent company loss in investors, managers may inflate  numbers on a financial report, which can include selling their accounts  receivables to expand the cash in their operating activities which will  appease shareholders but can cause sanctions against the financial  accounts standing board. To prevent this from happening, congress should  be allowing quality financial reporting which includes giving customers  more information about their company which will decrease their  uncertainty. Management that attempts to supply convenient data “should  have a safe harbor against sanctions for their legitimate efforts to  improve reporting quality beyond GAAP. FASB should issue standards that  identify best practices and weaker alternatives and require managers who  don’t adopt the best practices to explain why” (Miller, 2002).  Conclusively, by giving shareholders and investors more information  through quality financial reporting, companies will have lower capital  which will increase the efficiency of their long term funds.

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