Factors influencing Accounting Quality
Because the mechanisms that limit manager' ability to distort accounting data themselves add noise, it is not optimal to use accounting regulation to eliminate managerial flexibility completely.
Therefore, real-word accounting systems leave considerable room for managers to influence financial statement data.
The net result is that information in corporate financial reports is noisy and biased, even in the presence of accounting regulation and external auditing .
The objective of accounting analysis is to evaluate the degree to which a firm's accounting captures its underlying business reality and to "undo" any accounting distortions.
When potential distortions are large, accounting analysis can add considerable value.
There are three potential sources of noise and bias in accounting data.
1. That introduced by rigidity in accounting rules.
2. Random forecast errors.
3. Systematic reporting choices made by corporate managers to achieve specific objectives. Each of these factors is discussed below.