Capstone Research Project - Essay Example

?Running Head: Capstone research project Capstone Research Project of the of the of the Introduction The rise and fall of organizations is dependent on the business practices adopted by them in a particular business environment. It is often assumed that the prime responsibility of any organization is to promote fair and honest business practices along with being transparent and honest to stakeholders in the short as well as in the long run. In terms of effective business practices, it is judicious to follow the prescribed financial standards and parameters of the recognized bodies. The Financial Accounting Standards Board designs Generally Accepted Accounting Principles for public and private companies. GAAP can be considered as a book of law that is not authorized by the government of the US but is followed religiously by the corporate community of the country. The guidelines mentioned in the GAAP are generally accepted by all companies and unwillingness to follow these guidelines has severe consequences that might even hamper the growth and development of the culprit organization. Over the years, wide arrays of organizations have tried to dress their financials in a manner that conceals the validity and financial information that might affect the overall decisions of stakeholders. In order to safeguard the interest of stakeholders, GAAP was introduced and has been great success in terms of acceptance and following across the world. The assignment aims at highlighting the importance of GAAP in context to Capstone Research Project by evaluating organization’s accounting practices and interpretations. Some of the issues pertaining to unfair business practices totally against the GAAP would be discussed in an analytical manner along with identifying the relevance and importance of GAAP in the financial world. The understanding would be presented through a series of example based on text books and journals understanding. Initial Findings After analyzing the accounting practices and interpretations of the organization, it was found that wide arrays of frauds and malpractices were prevailing in the financial system of the organization. Some of the fraudulent activities include: Leases on Technology Assets seems Inflated It needs to be understood that the organization uses technological assets to strengthen the operational activities. Leasing usually has a lower impact on the cash flow considering lower cash outflow at the initial phase. It needs to be mentioned that leases are not treated as assets and thus there is no reason to mention them in the balance sheet. Moreover, even if the leases on technology assets are shown in the balance sheet, it should be shown in a transparent manner without inflating or deflating its value. GAAP Rule- the GAAP rule states that usually operating lease does not affect the balance sheet of the organization as it is not considered as an asset and on the other hand, the expense is not highlighted in the income and expense statement. However, many organizations state leases in the balance sheet and income and expense statement just to dress the statements as per their needs and desires that is totally against the normal business practice (Barry, Jermakowicz, 2007 pp-965). Consequences of the Activity- it may be the case that the independent auditors and financial bodies highlight the fraudulent activity as inflating leasing assets affect the financial ratios and thus misguide the stakeholders in every possible manner. GAAP do not allow such acts and consider this as a serious offence. Measures to Control the Activity- An independent set of auditors should be appointed by the organization working in tandem with the internal auditors to control and manage the transparency of financial statements in an honest manner. The management should take the initiative of appointing independent auditors auditing financial statements at regular interval along with promoting honest and ethical business practices to earn an honest place and image among wide arrays of stakeholders. The chartered accountants and chief financial officer should be offered proper guidance and guidelines to work in line with the common principles of GAAP along with promoting fair business practice in every sense. Understatement of E-Commerce State Tax Payments The United States has the policy of taxing e-commerce activities and organizations are supposed to pay their taxes. However, in case of small and medium organizations, e-commerce taxes are levied in order to safeguard state’s and organization’s interest. Most organizations try to violate rules pertaining to state tax payments by understating the amount of e-commerce state tax. It needs to be understood that taxes come under the expenses of the organization that affect the net profit. In order to increase the net profit and to create a positive impact over the balance sheet, the understatement of e-commerce taxes often works. However, GAAP does not allow doing so and every organization under the liability of paying taxes has to pay them on time by offering good amount of information on e-commerce transactions in a detailed manner. Consequences of the Activity- the organization faced for the fraudulent may charge against the forgery facing severe penalties. The internal auditors should keep a tab on the transparency of such transactions as external auditors may scrutinize every possible fraud in terms of e-commerce taxes. Measures to control the Activity- the internal and external auditors should make sure that every e-commerce activity has been recorded and calculated taxes are shown in that particular period without manipulating the data and information. The organization should not think about short term profitability but long term relationship with wide arrays of stakeholders. Fictitious Employees receiving Post-employment Benefits One of the highly committed frauds within the organization is creating fictitious employees. It needs to be understood that fictitious employees are created to launder the money of the organization in a hidden manner. This act offers advantages and benefits to the culprit as the organization suffers. In most cases, someone from the top management or the bookkeeper is responsible for such fraud. The number of employees is either inflated or deflated to affect the financial statements in a positive or negative manner. However, in most cases, the number of fictitious employees is inflated in order to mint money at the back of the stakeholders in a sound manner (Whittington, Geoffrey ,1983, pp-66) Consequences of the Activity One of the negative consequences of creating fictitious employees is laundering the money of the organization that often cheats the stakeholders. Many organizations do not remove the name of past employees in order to gain some financial liberty at the cost of company’s profit and revenue generation. The organization get affected in the negative manner as employee’s salary account is inflated that also affects the income and expenses account and the net profit. Moreover, the balance sheet also gets tampered highlighting false entries and thus offering no help to shareholders in the short as well as in the long run. Measures to Control the Activity Identifying ghost or fictitious employees can be cumbersome task for the auditors and thus it is important to have an analytical and sound mind for assessing the whole situation. Some of the key steps that auditors can use to underpin the possible symptoms of “ghost employees” include: (Collins, Johnson, 2005 pp-48) Analyzing the payroll system of the organization Searching direct bank account number for direct deposits Verifying the list of employees along with cross checking human resource management data The fictitious employees often do not take holidays and can be considered as a major sign to be a fraud red flag Analyzing the name and list of terminated employees along with cross checking the accounts credited with the salary amount Hiding Cash in Order to Help in Future Quarters One of the most common practices used by the organizations to make their case strong in front of wide arrays of stakeholders in the future is to hide cash in order to help in future quarters. It needs to be understood that organization’s share prices are based on expectations of analysts deciding the pulse and beat of organizations based on their past financial record. If financial analysts assume that the organization has been performing well from last few years then the expectation level rises. In case of the organization not earning well in the current financial year, it will be under pressure to keep share prices constant. This compels to hide some cash in order to help in future quarters. The organization can hide cash by not showing the adequate and appropriate earnings. This creates a misbalance between the actual financial statements and the manipulated ones. Moreover, this also presents inappropriate information to shareholders and can be considered as a crime. GAAP clearly states that the organization cannot misguide shareholders by offering a wrong and manipulative picture of their financial statements. In case of such act, the organization would be responsible for offering a wrong picture of the organization and business operations and can be sued by the governing financial body in a lawful manner. Consequences of the Activity This act would affect the decisions of stakeholders along with presenting the wrong image of the organization. There is no denying that hiding of information is considered as a mischievous act especially when it can affect the lives of millions in a negative manner. The organization also becomes liable to face severe penalties on the ground of being manipulative and unethical. Measures to Control the Activity The chief financial officers along with the employees of finance department are responsible to keep a tab on such act. The cash inflow should be recorded along with actual amount in a chronologic order. Some of the key steps to be followed by auditors include: Cross checking the cash inflow and outflow in order to ascertain the amount of actual cash Cross checking the accounting books and book keeping patterns to understand the recording pattern Analyzing the inventory books and investments made to understand the pattern of inflow and outflow Evaluating the financial performance pattern of the organization in order to understand the past and present financial trends Concealing Inventory Shrinkage The percentage of inventory shrinkage is quite low in every industry but over the years, it has grown to new levels. Inventory shrinkage can be defined as the loss of inventory because of shoplifting, pilferage and administrative errors. Whatever, the reason is, it costs the organization by inflating losses affecting the financial statements. Most organizations conceal the inventory shrinkage in order to hide losses along with inflating the net income up to some extent. However, as per GAAP, it is not at all advisable to conceal any sort of information. Consequences of the Activity The concealing of inventory does not give the ideal information on the amount of stock and its current standing. It may affect the overall gross profit, net profit and balance sheet along with affecting few calculations that may prove to be important for shareholders in the short as well as in the long run. As per the GAAP, all kinds of income and losses have to be reported in the financial statements as per the relevance and inventory shrinkage should be no more an exception. Measures to Control the Activity There is no denying that the auditors need help from the administrator and concerned employees to control the activity. Some of the measures to control the activity include: Analyzing the inventory using LIFO or FIFO method Cross checking the amount of stock mentioned in the book with that of in the end Analyzing the number of wrong entries, pilferages and shoplifting It can be assumed that these measures are effective enough to control the flow of inventory along with highlighting the accurate amount to be shown in the financial statements. The inventory control department is responsible for managing the inflow and outflow of the inventory along with keeping a close eye on shop lifting, pilferages and wrong entries. This would help in assisting the auditors along with maintaining fair business practices in the present as well as in the future. The concealment of information, facts and figures should be controlled in every sense to present a lucid and transparent image of the organization. Recommendations for Correcting Red Flags Almost every organization face red flags in a direct or indirect manner and it becomes important to control them in an ethical and appropriate manner. Some of the recommendations include: (Crovitz, Gordon (2008) Maintaining an ethical and responsible organizational environment along with promoting lucidity and transparency in every sense Appointing responsible and effective manpower to conduct business activities in an honest manner Appointing internal set of auditors to audit financial reports and wide arrays of business activities Surprise auditing for various departments to ascertain the amount and extent of red flags Involved Personals It needs to be understood that employees and the management is responsible for frauds within the organization. In the above mentioned five cases, some of the people involved include: Most of the financial statement are developed and designed by the book keepers, accountants and financial officers. The fictitious entries are created by these people to gain some financial advantages The management is responsible for inflating assets and hiding taxes and income in order to create a positive image of the business. The third party does not have enough control over the organization’s operations and thus the management and the organizational culture should be blamed for getting involved in inappropriate and manipulating financial activities Recommendations for Internal Control The organization needs to change its organizational culture and climate by evoking a sense of reasonability and being ethical and honest. Some of the recommendations include: It is highly advisable to change the organizational culture and climate by making everyone responsible and answerable along with following the strict guidelines of GAAP in every sense The organization should appoint internal and external auditors. The internal auditors should audit the financial statements every week while the external auditors should audit the financial statements every month. This would help in creating a auditing balance along with keeping a tab on wide arrays of business activities (Loebbecke, Arens 1980, pp-56) The potential and existence frauds should be reported directly to the concerned department and if the management is responsible for the act then governing bodies should be notified The whistle should be blown the moment fraud is detected. This would help in creating a sense of fear in the minds of culprits. The decision should be taken quickly rather than lingering to it for a long period of time The management should constantly be in touch with the auditors and other concerned authorities of different departments to analyze the scope of manipulation, if any and thus taking appropriate actions to suppress them The GAAP guidelines and objectives should be followed by the financial department in every activity along with respecting the law and going by it to promote ethical business activities in every sense Conclusion The assignment has been presented in an analytical manner covering all the prescribed guidelines. The emergence of red flags and potential consequences along with controlling measures has been defined in an illustrative and critical manner. The presentation has been simple yet informative fulfilling the stated guidelines required completing the paper. References Epstein, Barry, Jermakowicz (2007). Interpretation and Application of International Financial Reporting Standards. John Wiley & Sons. p. 965 Whittington, Geoffrey (1983). Inflation accounting: an introduction to the debate. Cambridge, UK: Cambridge University Press. pp. 66 Collins, Johnson. (2005) Financial Reporting and Analysis, 3e. Pearson-Prentice Hall.pp-48 Crovitz, L. Gordon (2008-09-08). "Closing the Information GAAP". The Wall Street Journal. Retrieved 2008-09-24. Alvin Arens and James Loebbecke, (1980)"Auditing, an integrated approach" Prentice Hall pp-56 Read More