Reference no: EM132967721

Problem - Ethics and Governance: Understand Revenue Recognition and Expense Recording Revenue should be recognized when the performance obligation is satisfied and expenses should be recognized when incurred. Given some lack of specificity in these terms, companies have some latitude when applying GAAP to determine the timing and amount of revenues and expenses. A few companies use this latitude to manage reported earnings. Some have argued that it is not necessarily bad for companies to manage earnings in that, by doing so, management (1) can better provide investors and creditors with re- ported earnings that are closer to earnings (i.e., management purges earnings of components deemed irrelevant or distracting so that share prices better reflect company performance) and (2) can present the company in the best light, which benefits both shareholders and employees-a Machiavellian argument that "the end justifies the means.

a. Is it good that GAAP is written as broadly as it is? Explain. What are the pros and cons of defining accounting terms more strictly?

b. Assess (both pro and con) the Machiavellian argument above that defends managing earnings.