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    Accounting Theory : Objectivity and Bias

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    Objectivity (also called "verifiability") and bias (usefulness) are two extremely important characteristics of accounting. Examine each of the following situations for possible impact upon these key constructs.
    You work as an accountant for a corporation headquartered in the U.S. The Board of Directors recently convened, and while focusing on financial affairs, SFAS No. 114 came up as part of policy discussion. James Washington, CFO, introduced SFAS No. 114:
    "The latest standard on troubled debt restructuring, SFAS No. 114, calls for newly restructured receivables to be discounted at the original or historical discount rate.
    "It is important for you to know that this was the majority position, but two board members disagreed with the majority position because they thought the discount rate should be the current discount rate, given the terms of the note and the borrower's credit standing. Unfortunately, this issue impacts both verifiability and usefulness."
    The CFO and the Board is interested in this potential impact on objectivity and bias, and Mr. Washington has sent a request to all staff via email:

    - Hi, I received a request from our Board of Directors for accounting staff input regarding SFAS No. 114. In particular, they want to know how the consensus opinion of staff on how the use of the original or historical discount rate impacts objectivity and bias.-

    Mr. Washington now has enough information to report back to the board, but realizes that SFAS No.115 is also on the agenda. Acknowledging that the Board is likely to request the overall opinion of this entire staff, he quickly sends a message:

    - I just realized that SFAS No. 115 is on the agenda and that the Board will likely be interested in how you believe this change will impact objectivity and bias. As you know, SFAS No. 115 requires marketable equity securities to be carried at fair value or market value. Its predecessor, SFAS No. 12, required marketable equity securities to be carried at lower-of-cost-or-market. How do you see this change impacting objectivity and bias?-

    1. What happened here? Were there really any right or wrong answers?
    2. Why or why not?
    3. Can even a minimal exposure to accounting theory influence reasoning power?
    4. Is accounting theory really necessary for the establishment of accounting rules? Why or why not?

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    Solution Preview

    Please see response attached (also below) I hope this helps and take care.


    Let's look closer, although we have already discussed above some of the issues related to the following questions:

    1. What happened here? Were there really any right or wrong answers? Why or why not?

    When a Board has introduced a certain type of decision-making mode (e.g., consensus, majority rule, etc.) that is what determines the final decision-making process. I suspect that the two Board members lacked important knowledge of accounting theory or perhaps held biases (anchoring in the past models, for example), but as mentioned above, if the majority vote model was in place, it would have less impact (some, but not as much) on the final decision.
    So in these two scenarios, it is democratic process of voting on Board decisions and there really are no right or wrong answers. However, all Board members should be well versed in accounting theory and policy so as to make the best-informed decisions for the firm.

    2. Can even a minimal exposure to accounting theory influence reasoning power?

    Definitely - mainly because accounting theory suggests the practical (useful) issues that need to be addressed by the major ...

    Solution Summary

    In reference to the case scenario, the situation is explained in terms of right and wrong answers, and how accounting theory would have impacted the reasoning power. It then discusses if accounting theory is really necessary for the establishment of accounting rules, and why or why not. Includes references for further study.