Freedom in Accounting Choice

FREEDOM IN ACCOUNTING CHOICE

A CASE STUDY: ABC LEARNING CENTRES LTD

Executive Summary

With a base framework of accounting standards, freedom in accounting choice allows business managers to interpret financial information to be reliably tailored for the business, subsequently allowing understandability and comparability with past accounts and the financials of like companies.

The motives of managers are central to the selection of accounting choice, based on achieving specific objectives for the representation of the company in its financial reporting. It important that the motives of managers in exercising accounting policy choice is in line with company objectives rather than their own self-interest.

Freedom in accounting choice does provide a potential avenue for earnings management, whereby the selected accounting policy leads to a skewed representation of the business’ financial status. Within the bounds of accounting standards it can be difficult to detect.

In an effort to achieve rapid growth and maintain investor sentiment, it is arguable that ABC Learning Centres Limited abused the freedom of accounting choice through considerable manipulation of their accounting choice.

The Need for Accounting Choice

Accounting is a vital business function which communicates financial information about the entity to those with a legitimate interest in that entity and depend on the information to aid economic decision making, both by those within the entity and outside it (Deakin, 2009, Topic 1, p.7).

In Australia, reliability and relevance in financial reports is achieved primarily via the adoption of a conceptual approach that provide guide for accounting systems. This approach comprises Australian Accounting Standards, the Corporations Act 2001 (Cth), and foremost, the “Framework for the Preparation and presentation of financial statements” (Framework) as established by the Australian Accounting Standards Board (AASB). The Framework sets out...