THE ETHICAL PERSPECTIVERevsine (199

THE ETHICAL PERSPECTIVE
Revsine (1991) offers a discussion of the ‘selective financial
misrepresentation hypothesis’ which can be seen as offering some
defence for the practice of ‘creative accounting’, at least in the private
sector, drawing heavily on the literature on agency theory and positive
accounting theory. He considers the problem in relation to both
managers and shareholders and argues that each can draw benefits from
‘loose’ accounting standards that provide managers with latitude in
timing the reporting of income.
Revsine discusses the benefits to managers in being able to manipulate
income between years so as to maximise their bonus entitlements, as
discussed above. He argues that:
It is reasonable to presume that those who negotiate managers’
employment contracts anticipate such opportunistic behaviour and
reduce the compensation package accordingly…since they
(managers) have already been ‘charged’ for the opportunistic
actions they must now engage in them in order to achieve the
benefits they ‘paid’ for.
(1991:18)
Shareholders also benefit from the fact that managers can manipulate
reported earnings to ‘smooth’ income since this may decrease the
apparent volatility of earnings and so increase the value of their shares.
32 THE ETHICS OF CREATIVE ACCOUNTING
Other management action, such as avoiding default on loan agreements,
can also benefit shareholders.
At the heart of Revsine’s analysis are the implicit views that:
• the prime role of accounting is as a mechanism for monitoring
contracts between managers and other groups providing finance;
• market mechanisms will operate efficiently, identifying the prospect of
accounting manipulation and reflecting this appropriately in pricing
and contracting decisions.
On this basis he argues for freezing all existing accounting standards in
the private sector, to be used as ‘the basis for all future contracting and
reporting’. Instead future FASB work should be applied to the public
sector, including institutions such as the savings and loans where
publicly funded guarantees underpin their