The management approach and managerial behaviour: The need for checks and balances

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) propose to radically redesign the presentation of general purpose financial reports and to mandate the use of the management approach, thereby increasing managerial discretion over the presentation of information in those reports. The Boards expect this approach will assist users’ capital allocation decisions as it will facilitate managers providing entity-specific information. However, the literature provides mixed evidence as to how managers may respond to the adoption of the proposal. One view suggests that managers may reduce information asymmetry between themselves and users through the provision of additional information. In contrast, another perspective in the literature suggests that managers may engage in impression management, to the disadvantage of users. This paper examines a number of streams of literature which are related to the use of managerial discretion in the presentation of information in general purpose financial reportss and finds considerable evidence of opportunistic managerial behaviour. The study argues there are substantial weaknesses in the major structures the Boards will rely on to protect users from opportunistic behaviour. Potential avenues for research arising from the proposed introduction of the management approach are also provided.