Essay: Accounting Theorists

Sample Essay

The article relates the issue of restatements to the materiality concept of accounting to explain whether all restatements should be disclosed or only those which have significant value which is more than 10 percent higher or lower than previous values. The regulatory requirement for filing an 8-k within 4 days of declaring previous financial statements irrelevant for investors and shareholders is outlined and the article concludes with a statement from a former CEO and Chairman of Deloitte & Touche LLP regarding the disclosure of accounting errors and sly restatements by companies.

The positive accounting theory as discussed in class and pointed out by accounting theorists explains why managers prefer some accounting policies over others. This preference is mostly based on benefits derived from applying specific policies and methods (Rabin 2003). The discretion of managers whether to disclose restatements if they are not significant in nature perfectly relates to this theory. Managers can choose whether to disclose restatements of financial statements if the impact of restatements is less than 10 percent. Moral hazards in accounting are based on the risk involved in inaccurate disclosure of information to investors and share holders. When two individuals or entities form an agreement or contract implicitly or explicitly without consideration of good faith then risks arising out of incorrect decisions are termed as moral hazards (Wessels 2006).

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