Is accounting profit figure a measure of true profit of an organizations

Is chronicle benefit figure a measure of true profit of an organizationsAccounting rules and regulations ar a mish-mash of rather conflicting concepts(e.g. relevance and neutrality), giving managers discretion in deciding which principle to and non to apply(1). Profit is no unproblematic figure which can be computed easily(2), infact it is a thorough process of naming and counting(3) identifying, calculating and summarizing many references generated. Some of these items donot exist, and hence atomic number 18 brought into existence by identifying and appoint monetary values, some involve quantifying the qualitative, while calculation of others may involve managers choosing between different rules and methodologies(revenue recognisation, inventory, depreciation calculation using different techniques), all of which are accepted, by providing a simple reasoning or exclusivelyification for the choice. Hence, earning management itself is allowed in the profession giving managers t he discretion to twist and turn certain figures to take care their criteria, deliver the goodsd a proper reasoning is given.Prudence-an important rule in history, guiding managers that should a conflict arise, a conservative approach to be adopted, as not to be over-optimistic about performance. But now, it is a mere subset of reliability, replaced by faithful representation by IASB, following FASB(4). Should we now expect more use of fanciful accounting? Given the current credit crunch is it fair to follow USA? Does this mean that instead of using a careful approach as to which colors to use, managers are free to paint the picture in any way they like? Similar implications apply for the use of fair value accounting (driven by Hicks,1975, income and opportunity cost theory), affecting asset valuation and income recognisation. Also given diverse and conflicting rules, what maybe true for one family or country, maynot be true for another(due to different accounting bodies). Theref ore profit is merely creating rather than reflecting reality(5).Another point to discuss is sly(positive accounting theory) based on surreal assumptions as long as they are a good prediction, and underlying hypothesis are never rejected if proven wrong(6). The diagram below shows that in every step of PAT methodology there is a lot of subjectivity, and half of the time they donot tell what assumptions have been made.PAT is based on decade Smiths rational economic man stating that all choices are based on self come to and accumulation of private wealth hence accounting methods provide be chosen to mislead and disguise performance(7). Agency theory (Jensen Meckling, 1976) is closely related to this, displaying conflict of interest amongst shareholders and managers, which justifies why managers may resort to earning management, especially if performance-based salaries are used (management compensation hypothesis, Watt and Zimmerman 1986).Shareholders appoint auditors as a protect ion of their rights and assurance that managers are managing the company to the best of their ability, to maintain decision making efficiency, simply auditors donot have access to all the information, and only base their decisions on the information provided by managers and given accounting regulations, does this information asymmetry means that auditors really provide a fair and truthful analysis of company reporting? Given the limited figures that auditors are given, can they analyze that profitability as shown by the company is actually correct? The answer is NO, and we have many examples much(prenominal) as Enron, Sunbeam, which despite been given unqualified audit reports, failed ultimately.Furthermore, as Watt and Zimmerman argue that PAT only gives a prediction of which method managers might use, but doesnot tell which accounting method should be used, for example a large company is apt(predicate) to use income reducing methods to avoid political attention (political cost hypothesis), debt hypothesis states that a company which is close to breaking its debt covenants will choose policies to ensure such covenants are not violated(8).Also, it is too simplistic to state that it is the only truth. Infact even if profit figure is aligned with companys actual performance, according to coherence theory it is just a truth(9), and not the ultimate reality. Although some might claim the contrary, as the media only compares the profit figures and doesnot refer to the variety of accounting policies that can be adopted(10).My air ends with the viewpoint, that although accounting policies and audit reports are designed to protect stakeholders from false reporting, but due to gaps in rules, managers still maintain the discretion to choose policies, which is exploited to construe their objectives, hence shareholders and auditors should use a pool of resources, such as return on investment(11), key performance indicators, share price and economic profit (bank inter est and return on other assets-12) to assess performance. Information is not stable, clear and self-evident(13), it is subject to constant change, and can be generated and interpreted in different ways. faithfulness is not in the numbers, it is only constructing reality using space, time and value machine(13), therefore users of accounting information should use their own judgment, knowledge and opinions before reaching any conclusion and not base decisions blindly on profitability alone.NOTESRhoda lecture notes The Growth of regulation International standards and conceptual frameworks of accounting.My first reflective percentageLecture notes Ann-Christine Frandsen Where do we find accountingLecture notes Dr Fiona Anderson Gough Early standards and normative theory, the influence of past on presentHines 1988Friedman, The methodology of Positive Economics 1953 go game Smith, The wealth of nations, 1776Lecture notes, Rhoda, Positive accounting theory (PAT)Lecture notes, Dr Fiona An derson Gough, Portraying successDeegan and Unerman, 2006Lecture notes, Ann Christine FrandsenBall and Brown, 1968Frandsen A-C (2009), Information Organisation