Current Issues in Financial Accounting - Case Study Example

Number and Number Current Issues in Financial Accounting Since the case of Enron, a lot of debate arises concerning Accounting and Auditing practices that are highly associated with fraud or the act of manipulating the company’s financial record. To keep away from accounting fraud practices, Chen, Harford and Li explained that it is common on the part of the investors to strictly monitor the company’s financial record as their external auditing group. As a result of having a third party to check on the company’s financial record, it is possible for the company to have a very low level of organizational investment before committing fraud since most of these companies do not have effective accounting monitoring. After discussing the management’s responsibility in preparing financial statements and auditors’ responsibility in detecting accounting fraud or miscalculation, this study will discuss issues related to the practice of deceitful book-keeping and ways on how to detect such accounting mistakes. As part of conclusion, strategic ways on how auditors can reduce the gap between accounting and auditing will be examined. Managements Responsibility in Preparing Financial Statements and Auditors’ Responsibility in Detecting Accounting Fraud and Error Using the generally accepted accounting principles (GAAP) in UK, each company are mandated to prepare accurate financial record. In line with this, finance manager should ensure that the company is able to hire and/or train registered accountants to improve and correspond with the company’s approved accounting policies and practices. The problem with most businesses is that companies are often after the company’s possible income. For this reason, there is a strong possibility for accountants to manipulate the company’s financial record as mandated by the company owners. To prevent the practice of falsifying the accounting numbers, each company should hire the professional service of external auditors to inspect the accuracy of the company’s financial records. Based on the legal system in UK and the UK GAAP, auditors should closely monitor and confirm that the company’s financial record is accurate. This is possible by regularly searching for signs of irregularities in the company’s financial record (Ernst and Young LLP). Aside from observing the company’s accepted accounting practices, auditors should oblige with the legal and regulatory requirements as stated by the UK’s International Standards on Auditing (ISA). Given that auditors found evidences of irregularities, possible corruption or honest miscalculation in the company’s financial record, the auditors should immediately contact the Assistant Director of Audit or the Anti-Fraud Division to report the case. Eventually, these agencies will be the one to conduct further accounting investigation. Accounting Scam and Ways to Detect Accounting Scam Companies engaged in accounting scam are expected not to disclose the company’s true financial record or any sensitive information that would suggest accounting manipulations to the public investors. For this reason, it is sensible on the part of the auditing committees to develop a process that will make responsible employees report questionable accounting techniques or bribery to the authorized parties (Akin Gump Strauss Hauer & Feld LLP 24). Despite the limited internal data submitted to the auditors, it is still possible to trace some signs of accounting scam by closely checking the computation of accruals, the actual figures reported in the stock market aside from the overall company’s accounting presentation (Dechow et al.; Beneish). Accounting scams can be in the form of: expense rescheduling, recording fake revenues, recording revenues that has not yet been collected by the company, hiding the actual corporate liabilities, and other factors like confession of inadequate data in the company’s footnotes as presented in the company’s financial record (Akin Gump Strauss Hauer & Feld LLP 6). To convince the target shareholders to invest their excess money in the business, financial scams like the practice of falsifying the company’s actual sales and revenue is very common in the field of accounting. To enable auditors have the ability to trace accounting scams, auditors should investigate signs of customer complaints including the in and out of the company’s raw materials and actual production output (Akin Gump Strauss Hauer & Feld LLP 8). In general, the act of hiding the company’s actual corporate liabilities and other financial obligations in the official financial record enables the company to draw more public investors for business expansion. Even if the corporate shareholders appear to be trustworthy and innocent, auditors should make it a habit to conduct a thorough background check to ensure that each members of the board including the registered accountants are not involved in any past accounting scams, stealing or any forms of dishonesty and unethical business practices (Akin Gump Strauss Hauer & Feld LLP 10). Chung, Firth and Kim revealed that companies with a large group of shareholders are more likely to decrease the amount of revenues that company made each year through accruals. Likewise, auditors should also check on the long-term business projects and decisions made by the business owners (Chen, Harford and Li). By practicing strong internal and external auditing, companies that are practicing accounting scams will be prevented. As compared to investor-based large-scale companies, businesses with a very few investors such as in the case of a family business are most likely to integrate the appraisal of flexible accruals into the stock prices (Balsam, Bartov and Marquardt). Aside from showing signs of misrepresentation in the company’s accruals (Collins, Gong and Hribar), investors should take advantage of the accounting based stock price anomalies in relation to the public announcement of its post-earning flow (Ke and Ramalingegowda). Conclusion It is common on the part of public investors to react negatively in case a company has been reported practicing accounting scam. Since the practice of accounting scam can make the public investors suffer from heavy investment losses, internal and external auditors are made responsible to detect and report cases of accounting scams. Due to lack of knowledge and data with regards to the main role and responsibilities of auditors, there is a tendency for audit expectation gap to develop. Therefore, trainings on proper auditing should be considered in order to strengthen the capabilities of internal and external auditors to protect the welfare of public investors from abusive business owners. References "Akin Gump Strauss Hauer & Feld LLP." 2004. How to Detect, Preent and Litigate Accounting Fraud. 23 November 2010 . Balsam, Steven, Eli Bartov and Carol Marquardt. "Accruals management, investor sophistication, and equity valuation: evidence from 10-Q." Journal of Accounting Research (2002): Vol. 40, No. 4, pp. 987-1012. Beneish, Messod D. "The detection of earnings manipulation." Financial Analyst Journal (1999): Vol. 55, No. 5, pp. 24-36. Bushee, Brian J. "Do institutional investors prefer near-term earnings over long-run value." Contemporary Accounting Research (2001): Vol. 18, No. 2, pp. 207-246. Chen, Xia, Jarrad Harford and Kai Li. "Monitoring: Which institutions matter?" Journal of Financial Economics (2007): Vol. 86, No. 2, pp. 279-305. Chung, Richard, Michael Firth and Jeong-Bon Kim. "Institutional monitoring and opportunistic earnings management." Journal of Corporate Finance (2002): Vol. 8, pp. 29-48. Collins, Daniel, Guojin Gong and Paul Hribar. "Investor sophistication and the mispricing of accruals." Review of Accounting Studies (2003): Vol. 8, No. 2-3. Dechow, Patricia, Weili Ge, Chad R. Larson and Richard G. Sloan. Predicting material accounting manipulations. Working Paper. Michigan: University of Michigan, 2007. "Ernst and Young LLP." 19 December 2007. Independent Auditors Report to the Council of the University of Exeter. 23 November 2010 . Ke, Bin and Santosh Ramalingegowda. "Do institutional investors exploit the post-earnings announcement drift." Journal of Accounting and Economics (2005): Vol. 39, No. 1, pp. 25-53. Total Number of Words: 1,010 Read More