Which of the following statements regarding creative accounting is LEAST CORRECT?Group of answer choicesDebtholders are able to impose restrictions on companies that may incentivise managers to undertake creative accounting.Agency theory predicts that managers will act to advance their own self-interest.Creative accounting can encompass accounting policy choices that are consistent with the requirements of the accounting standards.Managers are hypothesised to have no incentive to reduce the profit below what would be a faithfully representative figure.
Question
Which of the following statements regarding creative accounting is LEAST CORRECT?Group of answer choicesDebtholders are able to impose restrictions on companies that may incentivise managers to undertake creative accounting.Agency theory predicts that managers will act to advance their own self-interest.Creative accounting can encompass accounting policy choices that are consistent with the requirements of the accounting standards.Managers are hypothesised to have no incentive to reduce the profit below what would be a faithfully representative figure.
Solution
The least correct statement regarding creative accounting is: "Managers are hypothesised to have no incentive to reduce the profit below what would be a faithfully representative figure."
This is because managers may have incentives to reduce profit figures in certain situations. For example, they might want to show lower profits to reduce tax liabilities or to manage expectations for future performance. Therefore, this statement is least correct.
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