100 ACCOUNTING FOR MANAGERS
to distract attention from poor performance; or maintaining or boosting share
prices (Gowthorpe and Blake, 1998).
Despite the role of accounting standards and other regulations, creative account-
ing has always played a part in the efforts made by a few companies to present their
performance in a better light. Griffiths (1986) commented on the power of financial
analysts and investment advisers in the City (of London) and the aim of company
directors to present the business as having steady growth in income and profits.
This desire for a smoothing effect can be achieved by practices such as accruals,
stock valuation, creating or reducing provisions, capitalizing or expensing costs
and off-Balance Sheet financing (which was the main factor in Enron’s downfall
in the United States). While creative accounting has been frowned on, earnings
management has not. Under earnings management, directors aim to satisfy the
market expectations influenced by stock analysts.
Smith (1992) described the techniques adopted by companies and claimed that
‘much of the apparent growth in profits which had occurred in the 1980s was the
result of accounting sleight of hand rather than genuine economic growth’ (p. 4).
However, although accounting standards continually improve, there are always
loopholes that accountants seem to find as quickly as standards are produced.
Richardson and Richardson (1998) emphasized the role of accountants in
organizations. They occupy special positions that privilege them to information
that has the potential to reveal deviant top management behaviour, which can lead
to social and emotional costs for innocent stakeholders and to corporate failures
(such as those caused by Robert Maxwell and Polly Peck’s Asil Nadir). As these
conflicts are unlikely to be resolved internally, the authors argue for the ability to
‘blow the whistle’. However, as things stand, it is more likely that the accountant
will simply leave the organization. The problem withwhistleblowing, the authors
comment, is that to some it is an act of subversion, while to others it is an act of
citizenship. To the organization, it is an act of disloyalty.
Conclusion
This chapter has provided the tools for analysing financial information. While an
analysis of the financial statements is useful, particularly for external interested
parties (shareholders, bankers and financiers, the government etc.), the information
is of limited use to the internal management of the business because:
žit is aggregated to the corporate level, whereas managers require information
at the business unit level;
žit is aggregated to annual figures, whereas managers require timely information,
at not less than monthly intervals;
žit is aggregated to headline figures, whereas managers require information in
much greater detail;
žit does not provide a comparison of plan to actual figures to provide a gauge
on progress towards achieving business goals.