International Accounting Profession - Essay Example

The frequency at which more and more companies are being exposed of the accounting irregularities that they have been concealing, has disturbed the honor and trust that Certified Public Accountants (CPA) had so far been proud of. Financial restatements, bankruptcies of major companies caused by financial statement fraud and related audit failures are responsible for the loss of confidence (Rezaee, 2004). Concerns have been raised about the integrity and quality of the financial reporting as they have not been able to satisfy the major stakeholders of an organization. The international accounting profession has truly lost its way and is no longer serving the needs of different users of accounting information, in a manner which is appropriate and meaningful for the global business environment of today. Organizations are political arenas in which various forces and coalitions compete. There are seven stakeholders that are affected directly or indirectly by corporate actions (Joyce, 2005). Stakeholders include the owners (who have invested a portion of their wealth or the shareholders), employees (who seek fair and respectful treatment by the company), the government (who has to ensure that companies comply with all rules and laws), customers ( who are looking for reasonably priced quality products that are safe), community (local, regional and national), competitors ( keep the company abreast of developments and helps to avoid unethical business practices), and social activist group (going against them may give rise to negative media attention for the accountant). All these fall under the responsibility of the accountant as they have a duty to use some of their resources to promote the interest of various elements of society beyond their clients and firms. Between 1973 and 2004 the accounting profession came under scrutiny as different accounting methods were used to exploit the situation (Holtzman, 2004). For instance, companies used the pooling or purchase accounting method in accounting for mergers and could exploit the method for calculating goodwill. Companies hunted for firms that could use liberal accounting practices. Two studies - the 1977 Metcalf Report and the 1978 Cohen Commission Report – drew attention to the perceived failures of the profession. There was decline in the quality of audits as the profession participated in the low bidding of audit engagements. Financial statements became less auditable. Cases of auditing fraud embarrassed the accounting profession and raised questions about the propriety of auditing and accounting. Different stakeholders have different interests and these may not always be aligned with the corporate objectives. Shareholders want financial returns for their primary expectations and value added for their secondary expectations (Yeoh, 2007). The directors focus on profit maximization over the short-term. Accountants have a responsibility towards all the stakeholders and not just the shareholders. It is because of their affinity to maximize shareholder value that several accounting scandals have shaken the corporate world. At Enron, one of the directors did bring the accounting irregularities to the notice of the CEO (Williams, 2002) but as the leadership was concerned with hiding the shareholder value, the debts were hidden and the profits over emphasized, in connivance with the accounting firm (Gardner, 2006). The company’s liabilities were understated but things took a sharp turn when the company’s stock price fell in 2001 from $34 per share on October 16 to a few pennies per share on November 28 (Comunale, Sexton & Gara, 2006). Arthur Anderson, one of the Big Five in the accounting profession was the accountants responsible for this. When the new spread of the anomalies, they even disposed off the documents and deleted electronic records. The firm is now barred from conducting public company audits but the development had a ripple effect across nations including the developing countries (Ghosh, 2002). They served the interest of the shareholders and the directors while ignoring their responsibility to the other stakeholders. At WorldCom too, it was the over ambitiousness of the CEO to acquire several companies with the stocks of WorldCom led him to boost the company’s profits artificially by as much as $3.9 billion (Bhattacharya, 2004). Costs were considered as capital investments and depreciation claimed on it. Again, in connivance with the CFO, the CEO used the loan money to buy personal ranches and all of such information was hidden from the external auditor. The facts and figures were not made public, again demonstrating that the accounting profession has narrowed down its responsibility to the shareholders and directors. Xerox has admitted that it would have to reclassify more than $2 billion of its revenues. Under pressure from Securities and Exchange Commission (SEC), they have announced the extent of their overstatement (Ghosh, 2002). Once again, one of the Big Five accounting firms were involved and had apparently not noticed the discrepancies. K-Mart has to lower its profits after it admitted to incorrect accounting methods. The stock market value depends on the results presented to the public and wrong accounting misleads the public. The stock value also determines the directors’ remuneration and not just the assets (Ghosh, 2002). The same macroeconomic forces of slowdown and reduced investor confidence have affected the European and the Japanese companies in addition to the US companies. The public accounting firms have also diversified into other areas of operation. They have embraced new consulting oppurtunities in the information technology sector, operations management, operations research, and other management advisory services (Holtzman, 2004). These were undertaken to increase the revenue and profitability of the firm but in the process it created irreparable damage to the accounting profession. Audit was ignored and there was no sensitivity to understand the potential corruptive effects of the performance of the non-audit services for audit clients as competition among the accounting firms increased. Such diversification perhaps was responsible to some extent of the inflated accounting figures at Enron. The accounting firm had received a large amount of fees from Enron for non-audit services. The Sarbanes-Oxley Act came into effect soon after the Enron exposure. Following these, the rules for auditor independence was also revised by the SEC. It is thus evident that the accounting profession has under played the importance of audit and there focus has shifted to management consulting. They were concerned with growth and revenue which forced them to ignore the auditing norms. Professional accounting values suffered in the process. They violated the norms and standards of audit and they gave in to the pressures of the CEOs of the firms as it suited their own growth plans. They accepted the personal incentives to please the directors. The accounting information is used by the public, the government and other stakeholders but the way the accounting professionals have hidden facts it has misled all the stakeholders. The international accounting profession has lost its way and is not able to serve the users with appropriate and meaningful information. References Bhattacharya, S 2006, STREAM: Critical Accounting and Challenges to Notions of Progress, Issues in Corporate Governance, retrieved online 11 December 2008, from http://www.mngt.waikato.ac.nz/ejrot/cmsconference/2005/proceedings/criticalaccounting/Bhattacharya.pdf Comunale, CL Sexton, TR & Gara, SC 2006, Professional ethical crises A case study of accounting majors, Managerial Auditing Journal, vol. 21, no. 6, pp. 636-656 Gardner, N 2006, Profit-driven corporations can make management blind to ethics, retrieved online 11 December 2008, from http://bschool.washington.edu/new/full_stories/blind_to_ethics.html Ghosh, J 2002, Corporate skulduggery, retrieved online 11 December 2008, from http://www.hinduonnet.com/fline/fl1914/19141050.htm Holtzman, Y 2004, The transformation of the accounting profession in the United States, Journal of Management Development, vol. 23, no. 10, pp. 949-961 Joyce, WB 2005, ACCOUNTING AND SOCIAL RESPONSIBILITY, Journal of Accounting and Finance Research, vol. 13, no. 3, pp. 1-8 Rezaee, Z 2004, Restoring public trust in the accounting profession by developing anti-fraud education, programs, and auditing, Managerial Auditing Journal, vol. 19, no. 1, pp. 134-148 Williams, D 2002, Blurred standards: when corporate ethics fall by the wayside, so does the publics trust - Brief Article, retrieved online 11 December 2008, from http://findarticles.com/p/articles/mi_m4422/is_5_19/ai_91213367 Read More