Financial and Management Accounting Practices - Amazon, Google - Essay Example

Leadership in Nursing Contents Introduction 3 Discussion 4  Financial and Management accounting practices followed at the chosen companies 4 Analysisof accountability 5 Analysis of representation 7 Analysis of control 9 Google Inc. 9 Amazon 10 Conclusion 11 References 12 Introduction Accounting and management disclosures are used by investors and other stake holders to get a picture of the company. These documents provide various important and relevant information’s about the general and financial health of the company. The documents provide a brief representation of the company to the stakeholders. However fact that should always be kept in mind is that representation is not same as reality. A representation is like a picture of an individual that possess likeness to reality. The technology giants often change accounting practices in order increase the company’s valuation. In the following pages accounting practices at Google and Amazon in particular have been discussed. These practices have been analyzed based on accountability representation and control. For example just before going public Google changed its accounting practices by including cash that was shared with its distributers. Earlier the cash that was shared with the distributers was not included in the revenue figures. However the company changed the existing accounting practice just before going public and stared including cash that was shared with the distributors in the balance sheet. By introducing this change the company changed the way it was valued until then. However all companies do not incorporate similar changes in the accounting ways. Groupon for example earlier used to include cash payments to retailers in their revenue statements before going public. But since its filing in the stock exchange, Groupon has changed that practice. Not the figure that it publishes is called net revenue and excludes the cash that are paid to the retailers. Back in the 1990, when Amazon was a young company the company invested a lot of cash. These investments were considered back then as revenue expenditure. However most of these investments would help these take companies in future. So these can also be considered as capital expenditure. Back in the 1990s when Amazon was a young company it disclosed this expenditure as operating expenditure. Amazon remained in loss in that period. However if Amazon would have disclosed these statements as capital expenditure then Amazon would have experienced loss. Discussion  Financial and Management accounting practices followed at the chosen companies Accounting is used to influence the evolution of management identity by determining which aspects of performance are made visible. It is like the portrait or picture of a company. It is a representation of the reality but not reality in itself. Management however does not technocratic ally apply accounting measurements. The strategies incorporated by the management are influenced by how different factors such as worker skill and product competition do affect workers capacity to resist. By incorporating labour’s needs, or mobilizing efficiency ethos, managements dilute capital interests and reflect the politics of dialectical control (Saravanamuthua and Tinkerb, 2003). Amazon is the largest online retailer which has changed the way customers shop for things around the world. Every click that its customer generates leads to one of the several Amazon warehouses. There are 8 such warehouses in UK which covers nearly 54 million square feet. A typical warehouse is about 800,000 square feet of storage. Once the click reaches here the job of the workers is to find those articles and that too within specified time (Spector, 2009). The workers in general are required to pick up 110 items an hour or 2 items every minute. An average worker has to pick up an item every 33 seconds. For the day shift the pay package is about £6.5 pounds an hour. At night the rate increases to about £8.25 per hour (BBC Panorama, 2013). The workers are required to do about 4 shifts a week each of 10.5 hours with a one hour break. In this period of 10.5 hours the workers walk around in order to find all the items as per the cart the worker has to walk for about 6 miles during the day and for about 11 miles an hour. It is required as per law to ensure that if the work involves heavy mental and physical strain then that worker should not be made to work for more than 8 hour in 24 hour period. This requirement could put Amazon in legal trouble. However Amazon says that its shifts are not gruelling and has been designed keeping in all the legal requirements intact. However experts are of the view that the work as a picker in the Amazon warehouses has a bad effect on mental and physical health of the workers. However Amazon does not acknowledge this view. It has a disciplinary action where for each day leave the worker earns a point and for arriving late even by 2 minutes or leaving the day early since you are sick earns them, half a point. If an employee earns 3 points he is fired. Amazon runs a very cheap and efficient system that delivers things timely and a low cost to its customers. But in doing so it may has to compromise on the health issue of the workers. The question is to what extent is this process justified? Almost all tech companies change their accounting practices in order to reflect on the company’s valuation. For example before going public Google changed its accounting practice. The search giant initially excluded cash that was shared with its distribution partners in the revenue figures that it provided (Merced and RUSLI, 2011). However at the time of going in for publicly being listed it changed that practice. At that time it started including cash that was shared with its distribution partners in the revenue figures thus effectively changing company valuation. Analysis of accountability It is a common notion that if an individual is held accountable then there are several positive effects. It is known that different forms of accountability produce different forms of self and relationship to others. It is commonly stated that hierarchical forms of accountability, within which accounting plays a significant and central role, serves to produce and reproduces an individualized sense of self. Accountability forces a person or company to be nervously preoccupied when one is solitary with the thought of how one is seen. It is often argued that present day organizational accountability is set around an untenable split of ethical and strategic concerns to the determinant of both (Roberts,1991). There are different measures that can be used to value a company. Each valuation method values a certain company at a higher level than its rival companies. For example if one uses market capitalization as the measure of value then Apple values much bigger than Google. However, if enterprise value is considered instead as a measure of value then Google values much more. To get the enterprise value of a firm one has to subtract market value of cash and other non operating assets from firm value in order to arrive at the enterprise value. Enterprise value should be made equal to the market value of the operating assets of the company. Out of several features, one of the features of enterprise value is that it is relatively immune from purely financial transactions. Google not only makes change accounting practices to reflect changes in company valuation from time to time. Google like other tech companies whose main resource is human capital and knowledge resource cut its taxes by $3.1 billion in last three years. How did Google achieved to do so? The case is very simple. Google exercised loopholes in international taxation to shift profits to tax heavens and all expenses to those countries where the rate of corporate tax is higher. By the utilization of what is known as transfer pricing, Google essentially reduced its international tax rate to 2.4 percent. The rate for Google is lowest among the top 5 technology companies in the USA by market capitalization. Google operates in most of the countries where tax rate is higher than 20%. For example in USA the tax rate is 35% and in UK it is 28%. However what Google does it to shift the foreign profits through Irelands and Netherlands to Bermuda. However in doing so Google does not face any legal challenges and is facilitated by the Irish tax law to legally shift profits into and out of the subsidiaries of the company located there and thereby escape the 12.5 % tax rate that is prevalent in Ireland (Drucker, 2010). The earnings end in island countries which effectively have no corporate tax rate present. However, Google is facing dispute regarding tax payment since 2006 with parties not ready to concede defeat (Barker, 2007). Amazon too has faced similar enquires in the past from SEC over the accounting practices that it had used and the disclosures it had made in view of the acquisitions. Amazon at that time did a no. of partnership with several other tech companies. The crust of the discussion with Sec focussed on accounting practices that were used to value and present those partnerships (Wolverton, 2000). Analysis of representation One of the researchers argues that both current and reformed accounting cannot make explicit representations. It is concluded however that the pursuit of unrealizable ideal is very real and productive. There are a number of implications of the analysts that are then considered. However contrasting with the view of other researchers and the general view that says that there should be unambiguous accounting representation and it is both desirable and possible; that there is no such like that is present in between the critiques and the actions advocated by them (Mcsweeney, 1997). Amazon had faced enquiry in 2000by sec regarding the accounting disclosures that involved valuing its partnerships with other companies. Two Lehman analysts found out that there were more concerns regarding the accounting practices that are used by Amazon. They say that Amazon treats fulfilment costs as marketing expenses. However it should be treated as cost of goods sold. Although if bottom line is considered it remains unaffected whether fulfilment costs are considered as marketing expenses or as cost of goods sold. But it is to be considered that for retailers, gross margin is the key industry wide barometer in order to measure profitability and while comparing one retailer to another (Schneider, 2000). In 2003 Amazon reported that their second quarter sales has surged 21% to reach $806 million. Operating cash flow of the company was $4.6 million and net loss was $94 million. Amazon could not see the face of profitability that year in the face of currency related losses. However the problem with its disclosure was that nobody seemed to believe what it had to say. It is because the company has long accounting systems that have been hard to follow and fully understand. In an era where credibility and reputation is everything the Amazon has suffered serious blows. Since 1999 till 2003 the company had faced a minimum of 3 Federal enquiries. While the company has not been ever fined, these incidents have seriously hurt the company’s image. To earn the reputation and loyalty of customers, Amazon must understand that it is not enough to sell quality products but also to maintain a clean image of the company in every respect. One thing that Amazon can do is to remove the term pro forma from its disclosures. It should disclose its financial statements based on GAAP accounting principles. Net companies over the World Wide Web are fighting amongst themselves for showing themselves as more credible, and investor friendly Amazon can play the role of a leader by incorporating GAAP based accounting standards and norms. Most people consider pro forma accounting as ambiguous and thus think that none of the internet and dot com ventures are really profitable. In fact the notion is true to some extent because as of 2003 only 50 out of 200 companies online actually make GAAP profit. In the earlier days when Amazon was just a start up pro forma based accounting might have been useful as everything was very uncertain and investments needed time to actually pay off. But times have changed and Amazon has come a long way. In this changed context Amazon must understand that it has to change its reporting practices under the issue of earning greater trust (Mullaney, 2002). Analysis of control The control theory mainly deals with focussing on the gaps and the differences and offering suggestions towards the development of the future. Google Inc. The Google enterprises its product with the help the users of the work in enhancing the products of the customers that is included with number of features and controls the various needs of the business in a way that the product becomes productive, innovative and successful. Various applications and tools are included by Google such as the Google drive, Google sites, calendar and many more items. These are mainly developed to facilitate the working of the people on any device at anytime and anywhere without considering the loss of control and security. Google has also introduced the Google map application programme for the conduct and functioning of the business. It also offers cloud services and infrastructure to its businesses and developers with the help of Google cloud platform. This platform mainly includes the services that are provided by the Google application engine, real analytics with the help of big query of Google, structured query language through the Google cloud and considering the infrastructure as a service namely the Google motor engine (Brandt, 2011). The patents, trade secrets, trademarks, copy rights and the various rights in relation to the intellectual rights are controlled by the management of the company. The events occurred outside possess a threat towards the right of the intellectual property, products, services and the various technologies that is adopted by Google Inc (Google Inc, 2014). Amazon The management, financial , operational and the various resources of the company are expanding and diversifying remarkably for increasing the services offered and the various products that are delivered for conducting the operations globally and maintaining the infrastructure that supports the service and the retail businesses (Byers, 2007). In addition to this the company was unable to continue or carrying out its activities in China as they were not able to easy access the sufficient funding that is required to build or develop the contractual relationship in respect to the control and management of such businesses. The difficulty or the problem that is faced in implementing the financial reporting, accounting and the management information in relation to the human resource, information security, and the various administrative system in order to conduct the effective management and the lack of control in case of the delay in integration . In case of the investment the investees of the financial performance mainly incorporates the financial results partially or fully to provide the dependence of the investors on the accounting of the investees, similar systems, the process and control and the financial reporting. The offerings in the digital contents depend or rely on the effective and efficient control of the management technology that facilitates the easy access of the digital contents. The management technology in case of the digital rights may include various malfunctions. Therefore it is required to control and supervise the technology. The management is responsible for maintaining and establishing the proper internal control in the financial reporting of the company (Amazon.Com, 2013). Conclusion Different technology companies use different accounting methods to disclose the information about the company. The use of different accounting systems has an impact on the value of a company as perceived by the investor or various stakeholders involved with the company. The use of different accounting system has also an impact on the tax that the company that the company has to pay and other related issues. The paper discusses about accounting practices as is followed by Amazon and Google in particular. In analysis of the accounting practices followed by these two company it has been found that both these companies have made several changes to the accounting practices used by them from time to time to reflect on the value of the company as perceived by the shareholders and other investors. Google has also used tax loop holes and transfer pricing principle to transfer their profit to tax heaven in order to save taxes. Both the companies have faced enquiries by SEC from time to time regarding their accounting practices. These enquiries has obviously dent hole in the company’s reputation. Although the companies have vehemently protested and said that the accounting practices used by them are fair still these enquiries have made the investors and general public sceptic about the integrity and transparency about the company. References Amazon.Com, 2013. Annual Report. [Pdf] Available at: http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual [Accessed on 26 December 2014]. Barker, C., 2014. Google defends tax-accounting practices. [Online] Available at. http://news.cnet.com/Google-defends-tax-accounting-practices/2100-1030_3-6163711.html [Accessed on 26 December 2014]. BBC Panorama, 2013. Amazon: the truth behind the click. [video online] Available at: https://www.youtube.com/watch?v=Ta7hTfI69xc [Accessed 26 December 2014]. Brandt, R. L., 2011. The Google guys: Inside the brilliant minds of Google founders Larry Page and Sergey Brin. London: Penguin. Byers, A., 2007. Jeff Bezos: The founder of amazon.com. NY: The Rosen Publishing Group. Drucker, J., 2010. Google 2.4% rate shows how $60 billion is lost to tax loopholes. [Online] Available at: http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html [Accessed on 26 December 2014]. Google Inc. 2014. Annual Report. Available at: http://investor.google.com/proxy.html [Accessed on 26 December 2014]. Mcsweeney, B., 1997. The unbearable ambiguity of accounting. The journal of accounting, organizations and society. 22(7). pp. 691-712. Merced, M. J. D. L. and Rusli, E. M., 2011. An Accounting Change Cuts Groupon’s Revenue, [Online.] Available at http://dealbook.nytimes.com/2011/09/23/groupon-changes-its-revenue-accounting/?_r=0 [Accessed on 26 December 2014]. Mullaney, T. J., 2002. Commentary: Amazon is all grown up, except for its accounting. [Online] Available at: http://www.businessweek.com/stories/2002-08-04/commentary-amazon-is-all-grown-up-except-for-its-accounting [Accessed on 26 December 2014]. Roberts, J., 1991. The possibilities of accountability. The journal of accounting, organizations and society. 16(4). pp. 355-368. Saravanamuthua, K. and Tinkerb, T., 2003. Politics of managing: the dialectic of control. The journal of accounting, organizations and society. 28(1). pp. 37-64. Schneider, C. 2000. SEC’s amazon.com inquiry could get much uglier. [Online] Available at: http://ww2.cfo.com/accounting-tax/2000/10/secs-amazon-com-inquiry-could-get-much-uglier/ [Accessed on 26 December 2014]. Spector, R., 2009. Amazon.com. NY: Harper Collins. Wolverton, T., 2000. SEC inquiring into Amazons accounting practices. [Online] Available at: http://news.cnet.com/SEC-inquiring-into-Amazons-accounting-practices/2100-1017_3-247542.html [Accessed on 26 December 2014]. Read More