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Supply and demand of accounting information
The existence of information asymmetry creates a supply and demand 
for financial reporting. Financial reporting is the preparation of 
information about the reporting entity and the transmission of that 
information from those who have it (supply) to those who need it 
(demand). Suppliers of accounting information refer to accountants and 
the body that produces the financial statements. Those who demand 
the information refer to internal/external users who require that 
information to make investment decisions. 
The Purpose of Financial Reporting
Although the specific objective and purpose of financial reporting may be 
different for different accounting bodies, the general theme is highly 
similar. According to IFRS, the objective of financial reporting 
is to 
“provide financial information about the reporting entity that is useful to 
existing and potential investors, lenders and other creditors in making 
decisions about providing resources to the entity. Those decisions 
involve buying, selling, or holding equity and debt instruments, and 
providing or settling loans and other forms of credit.” IFRS also states 
that these decisions depend on the user’s expectations on the risk, 
amount, and timing of future net cash inflows of the reporting entity. 
Those decisions involve buying, selling, or holding equity and debt 
instruments, and providing or settling loans and other forms of credit.” 
IFRS also states that these decisions depend on the user’s expectations 
on the risk, amount, and timing of future net cash inflows of the 
reporting entity.
Positive financial accounting theory
Given the non-ideal market that we live in today, it is only natural that 
management will take advantage of this information asymmetry.
Although company perceptions are important, managers are 
predominantly concerned with ways of maximizing their perks 
and their compensation. This is commonly referred to as earnings 
management, or management’s efforts to influence financial information 
in one way or another. Therefore, there is a theory called positive 
accounting theory that tries to understand a manager’s motivations, 
accounting policy choices, and reactions to different accounting 
standards.
Some reasons why earnings management is done may 
include the following reasons:

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