A Defense on Accounting Discretion: An Empirical Inquiry based on Users’ Awareness

Alharbi Macc Afaf M. () and Al-Adeem Khalid Rasheed
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Alharbi Macc Afaf M.: Master of Accountancy, Accountancy Department, College of Business Administration, Prince Suttam University, Saudi Arabia
Al-Adeem Khalid Rasheed: PhD, Accountancy Department, College of Business Administration, King Saud University, Saudi Arabia

Financial Markets, Institutions and Risks, 2022, vol. 6, issue 3, 26-39

Abstract: Corporate performance is a key in corporate accounting. One of the earliest accounting measures of corporate performance is accounting income. Accrual accounting enables the measurement of changes in net assets of an entity. Accounting income is neither scientifically determined nor proven. Accounting information often results from approximation and estimation when choice among alternatives is professionally judged, rather than exact measures and perceptions. Divergence in application of accounting policies in corporations under similar conditions may present different results. Some criticize corporate accounting, particularly after scandals related to financial statement fraud, for choices among procedures that accounting standards permit. However, choices in the application of accounting permitted procedures that accounting standards allow are based on professional judgment. Professional judgment enables accounting as a profession and allows accounting professionals to claim status in their respective communities. Exploring users’ awareness of corporate reports in Saudi Arabia in terms of flexibility in using accounting methods when preparing corporate reports and analyzing their understanding of corporate reports, this study surveyed 72 financial statement users. Research has found that sufficient efforts must be made to obtain information when making investment decisions. As accounting income is a result of applied accounting procedures and methods, users perceive information published in the financial reports, including notes, as understandable. Flexibility in applying accounting standards is imperative for adapting to changes in the entity’s business environment. Potential capital market investors must maintain a minimum level of knowledge; otherwise, they might be gambling their wealth or savings against the odds.

Keywords: Corporation; Measuring; Corporate Performance; Accounting Income; Accrual Accounting; Choices; Accounting; Procedures and Methods; Professional Judgment; GAAP; Reality; Understandability (search for similar items in EconPapers)
JEL-codes: G39 M4 M41 M42 O16 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:fmiris:v:6:y:2022:i:3:p:26-39:n:7

DOI: 10.21272/fmir.63.26-39.2022

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