Even though firms follow the accounting rules (GAAP) when presenting their finan

Question

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. 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.

Explanation / Answer

GAAP means Generally Accepted Accounting principles which make sure that firms present correct and proper financial statements. These principles define upto what extent the financial data can be shared with public and what guidelines to follow. Sometimes conflicts of interest exist between what management wants investors and creditors to see and the economic reality of transactions because some companies do not wish to show the economic reality to the investors as creditors and want everything to look good on paper as showing everything correct might affect their chances to get investment or loans. So such companies somtimes manipulate the data in such cases.

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