Question

Which of the following are indicators of possible management bias?

1) Changes in the method of making the accounting estimate that are based on subjective assumptions.
2) Selecting or developing significant assumptions that yield an estimate more favorable for management's objectives.
3) Selecting an estimate that indicates a pattern of optimism or pessimism.
4) Inspecting the outcome of prior period accounting estimates.

Answer 1

Indicators of possible management bias in accounting include subjective method changes, selecting assumptions that favor management's goals, and consistently optimistic or pessimistic estimates, while inspecting prior estimates is generally not considered an indicator of bias.

Step-by-step explanation:

Indicators of possible management bias within the context of accounting and financial reporting often include several behavioral patterns. A management team may exhibit bias by: Implementing changes in the method of making accounting estimates that are grounded on subjective, rather than objective, assumptions. Selecting or developing significant assumptions that produce an accounting estimate more favorable towards management's objectives, skewing financial results. Consistently choosing an accounting estimate that demonstrates a pattern of either optimism or pessimism, suggesting a lack of neutrality in financial reporting.

While the inspection of outcomes of prior period accounting estimates is a healthy practice for improving future estimates, it is not an indicator of bias itself. Instead, it is when this retrospective analysis drives consistent directional adjustment to suite management goals that bias is manifested.