Accounting and Audit - Assignment Example

PART I Q1 Levitt discusses gamesmanship in a very similar way to how it reads: Playing with numbers and hiding certain options from the balance sheet, as well as falsely driving up stock prices, is gamesmanship. He describes it in a way where motivation to perform unethical activities and deceive investors comes in the form of stock options which are forgotten during accounting reporting. He suggests that stock options should be charged to earnings at the company because they are costly and are tied to production (pbs.org, 2005). Using the stock options to change stock value, as a means to inflate accounting numbers or mislead reporting, is the gamesmanship which seems to have driven Enron to collapse. The options allow for dollars to be taken away from the company by internal staff members in a way that hides these expenses from curious investors. Q2 In reality, stock options do represent measurable value because they are tied to the current stock price. At Enron, the stock price was high (however falsely inflated) and investors were making money even with small increases in the stock value. So, if the company is doing well as internal staff members have the option of selling, this represents an expense to the company. There is no guarantee when these options are going to be cashed in, but they should be considered as part of a long-term “loan” (in a sense) and be recognized as a potential current expense. Even if the stock goes down, making the options less valuable, they are still eventually going to be an expense and they should be calculated into things like budget. In some ways, it seems like an extension of credit to the staff which they can cash into when they feel the stock price is high enough. It should be recognized as an expense on the income statement. Q3 All of the company’s stakeholders are affected by not recognizing the stock options expense. This includes private investors, small and large investors, the internal staff members, managers, and the generic community at large. In companies like Enron, there might be five or six senior managers who carry millions of dollars in stock options in their portfolio. So, there are about 20 million shares of stock options open currently at the company. If these investors suddenly decide they must act on these quickly, the company is going to take a tremendous expense right at that moment. This could lead to loss of short-term cash flow or even drive down the price of the stock further on the stock market. This could lead to job losses, investigations, or other negative consequences. These should be expensed on the balance sheet with a current valuation so that the company is prepared in the event of high volumes of cashing in of stock options. Q4 Yes, it would seem to be able to affect the overall economy. If companies are giving out false information about earnings (or other business expenses/issues), they are misleading investors who are giving funds to the company as a token of faith in leadership and that the company will continue to do well financially. The company can use these funds for business expansion or growth, which helps citizens in the community. However, when these numbers are incorrect, miscalculated or just plain forged, investors are buying stocks which are not worth what they believe they are and could be jeopardizing their investment portfolios in the process. This could lead to loss of personal assets, job cuts, or other issues which harm the economy. Accounting documents speak to the health of the company and if these numbers are incorrect, long-term strategy will be affected and perhaps even a scaling down of the company which reduces the need for workers in certain areas of the country. PART II Q1 The auditor’s report provides assurance to the investor, the internal staff members, and even the local community that all information which is delivered on the accounting documents is accurate, properly calculated, and meets all of the criteria set forth by various legislation. This is very important because investors who might be putting a great deal of investment income into the company want to know that the company is actually worth what is written on paper. A person buys stocks for the purpose of short- or long-term investment with the hopes that it will increase and be more valuable in the investment marketplace. If the accounting information is inaccurate, any number of negative consequences can occur. The auditor’s report highlights that the information submitted matches investigated documentation and can be considered highly accurate to the best of the auditor’s ability. It is an insurance policy; somewhat. Q2 Companies require someone who is not a part of the daily business activities at the firm to perform the audit because they are impartial and unbiased. Internal accounting professionals work with the company’s systems and processes continuously and it would likely be easier for the internal auditor to miss certain aspects of the accounting process or know how to bury it until the next reporting timeline. The independent auditor is unfamiliar with these systems and is only looking for specific criteria without the ability to shuffle certain business transactions to make them appear on different documents at different times. Independent auditors provide focus toward the goal of accurate reporting and are trained to do so without emotional attachment to the internal processes and systems at the company. Q3 Competence for the auditor should be expected and if they are impaired, this will adjust the credibility of the company’s accounting numbers and their internal ability to perform the accounting functions accurately. The reliance of the independent auditor is to help the company appear credible and create a positive public image for their external stakeholders and investors. The market cost of capital is quite high to the company at this point because auditor competence is being questioned and the short-term or liquid value of the company may be distorted in the minds of investors, thus driving down stock prices. This would suggest that there is the opportunity for the company to experience a temporary decrease in value if the information provided in accounting releases is inaccurate. Q4 Non-audit services provided by the auditor will familiarize him or her with the more intimate operations of the business and create relationships with others in the company. A business relies on accurate accounting and unbiased auditing to occur in order for the company’s investment potential to appear quality to external shareholders. If the nonaudit services begin, this allows the independent auditor to understand and sympathize with certain questionable internal processes related to accounting and maybe overlook them due to the relationships which are now being built. They should be focused on one task only and not be allowed to familiarize themselves with too many operations and psychological relationships with others in the business. The argument for the activity might be that the auditor would be allowed to understand more about how the business reports its numbers, thus being able to offer positive and innovative accounting solutions to the firm. Q5 Research would not indicate any clear support or opposition against non-audit services, however it would seem that the AICPA is both progressive and traditional in this respect. The company clearly understands the language of the Sarbanes-Oxley Act (thecaq.aicpa.org, 2009) and supports their personal obligations to the language of the legislation. They demand excellence in reporting and providing expert and professional, unbiased support for audit services. This would suggest a company which is supportive of restricting non-audit services. However, at the same time, the audit services company suggests that a more progressive and forward-thinking system of auditing is required, perhaps indicating that auditors can be allowed to provide non-audit services if such services are required by responsible companies. References Smith, H. and Shaffer, M. (2005). “Bigger than Enron”. Frontline. Transcript. Retrieved 15 Jan 2009 from http://www.pbs.org/wgbh/pages/frontline/shows/regulation/etc/script.html AICPA. (2009). “Sarbanes-Oxley”. Center for Audit Quality, American Institute of Certified Public Accountants”. Retrieved 15 Jan 2009 from http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/ Thecaq.aicpa.org. (2009). “The Changing Regulatory Landscape”. AICPA, Center for Audit Quality. Retrieved 16 Jan 2009 from http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/The+Changing+Regulatory+Landscape.htm Read More