Professional Accountant and its Objectives - Assignment Example

Professional Accountant Summary Both rules-based and principles-based accounting standards have good objectives. Both accounting standards aim to fill the financial report needs of the diverse stakeholders. The corporate governance provisions are the rules aspect of principles-based accounting. Accounting scandals show that rules based accounting focus on penalizing companies violating the accounting rules. On the other hand, the principles-based accounting centers on supplying the stakeholders financial reports that fit their decision making demands. Principles-based accounting includes compliance with the company’s corporate social responsibility requirements. Evidently, accounting standards enhance the stakeholders’ decision making activities by ensuring that the financial statements comply with the accounting standards. Part 1 Corporate Governance The corporate governance policies of the United Kingdom had changed after the Cadbury report. The Cadbury report emphasized that all financial reports should follow certain rules. The rules include the provisions listed in the Corporate Governance Code of the United Kingdom. The code strictly states that the United Kingdom publicly listed companies should implement all provisions of the code, especially in the preparation of the financial reports. The code prohibits the excesses of the board of directors and other parties within the organization (Solomon, 2011). Rules –based and Principles-based accounting standards Cynthia Jeffrey (2011) proposed that rules-based accounting requires that the business entities should comply with all corporate governance rules. Corporate governance includes the board of director’s strict compliance with social responsibility doctrines. Social responsibility includes ensuring all environmental protection laws are implemented. The rules include the procedures in recording business transactions. Rules must be followed at cost. There is no variation in the implementation of the rules. , International Accounting Standards Board Chairman David Tweedie insisted that the United States generally accepted accounting principles (U.S. GAAP) is basically rules based accounting (Jeffrey, 2011). The United States accounting procedure is historically pegged on rules-based accounting. United States entities implemented the United States generally accepted accounting principles in the preparation of the financial reports. Currently, many United Kingdom and other countries use the principles described as international accounting standards in the preparation of their financial reports. The United States –based Financial Accounting Standards Board (FASB) prepares and requires the implementation of the United States generally accepted accounting principles. On the other hand, International Accounting Standards Board (IASB) Chairman David Tweedie proposed that International Accounting Standards should be globally implemented. Chairman Tweedie theorises that the United Kingdom –based standards qualify as principles based accounting (Jeffrey, 2011). There is a significant difference between the principles-based accounting and rules-based accounting. Under rules based accounting, the accounting personnel and the auditors must implement the same rules to all its clients. The United States based generally accepted accounting principles reduces the chances of accountants and entities from presenting biased financial reports. The rules strictly prevent recording of revenues when the service has not been done or the product has not been received by the current and future customer (Jeffrey, 2011). On the other hand, Ken McPhail and Diane Walters (McPhail & Walters, 2009) proposed that principles-based accounting includes adjusting the recording of the assets, liabilities, and capital accounts to the diverse clients. The accountants and the business owners can manipulate the implementation of the standards to fit the best interest of entities’ management. Under the principles-based accounting, the entities’ board of directors is responsible for the management of the entity. The entities must tailor the financial statements to fit the decision making demands of the financial report users. The financial report users include the customers, suppliers, banks, creditors, employees, community, United Kingdom government, residents, and management. Second, both rules-based accounting and principles-based accounting offer different incentives. Rules based accounting discourages the accountants from violating the accounting rules. The auditor will state in the auditor’s report that the financial statements are not fairly presented in accordance with generally accepted accounting principles. On the other hand, the principles-based accounting is grounded on viable communication between the affected parties. The principles-based accounting incorporates moral incentives in the implementation of the accounting principles. The accountant and the entities must comply with their moral responsibility to present a realistic financial statement. There is a susceptibility difference between principles-based accounting and rules-based accounting. Rules-based accounting is susceptible to regulatory arbitrage. On the other hand, principles-based accounting is susceptible to strategic violation of the established accounting principles. Part 2 Now looking at a UK listed PLC of your choice you should examine the following; Many companies list their stocks in the United Kingdom stock exchange. One of the top publicly listed companies is J. Sainsbury PLC. The company’s online website is . The company is one of the top grocery chains in the nation. Increasingly dominant institutional investors’ issues The institutional investors are definitely increasing their investment dominance. The investors prefer to invest in companies that are profitable. The investors expect to receive dividends from the investment choice, J. Sainsbury PLC. The investors will investor more funds in companies that present an increasing net profit trend. As the net profits increase, the investors’ dividend income will correspondingly increase. Investors will not invest in companies that generate historical net loss figures. Likewise, many investors would prefer companies that comply with established corporate social responsibilities. Violation of the corporate social responsibilities will trigger lawsuits. Parties who are disadvantaged by the violation of corporate social responsibilities may request for redress from the United Kingdom courts. Consequently, the court cases present a negative image the company. For this reason, J. Sainsbury implements its social responsibility processes (). In turn, the board of directors of J. Sainsbury PLC successfully contributes its share to viably generating annual net profits. The board of directors is instrumental in maximizing the company’s scarce retail selling resources. Consequently, the financial statements present true business pictures of J. Sainsbury’s business operations. The J. Sainsbury’s 2012 income statement shows that the company generated a profitable business performance. The board of directors was instrumental in implementing an effective marketing strategy (). Further, the J. Sainsbury performance indicates it generated a remarkable grocery chain performance. The United Kingdom grocery company has been focusing on outperforming its grocery market segment competitors. The company implements values that are customer-based. The company sells products of high quality. The grocery chain’s store personnel offer excellent customer service to the company’s current and future customers. The company has been delivering value-based products to the community’s residents. Specifically, the J. Sainsbury’s investors received dividend amounting to £ 0.16 per J. Sainsbury stock (). Further, the company’s investors had approved the board of directors’ amendments to the company’s corporate social responsibility policies. Further, the board of directors presented all relevant financial information to the current and future J. Sainsbury investors. Further, annual elections include selecting some of company’s investors as new board of directors. The company offers induction seminars to prepare the new board of directors’ roles as managers of the J. Sainsbury’s scarce resources. The training includes the intricacies of the company’s unique corporate social responsibility strategies (). Further, the company continuously maintains an open line between the board of directors and the investors. Normally, Justin King, John Rogers, and Adam Wilson Katsibas are charged with accommodating the financial interests, and questions of the investors. In fact, Mr. Katsibas is J. Sainsbury’s present head of investor relations. The Chairman of the board of directors has more than enough time to entertain the queries, opinions, or comments of the grocery chain’s current and future investors. Further, the company’s Senior Independent Director is always available for any investor visits. The board of directors unwaveringly accepts feedbacks, including negative criticisms and complaints, from the company’s current and future investors. Makinson Cowell offers relations consultancy services to the J. Sainsbury’s board of directors. Cowell offers advice on how to attract new investors. Cowell also advises the company on how to retain the company’s current investors (). Also, the company offers the income statement to the current and future investors in order to persuade them to increase their investments in the company. For example, the company holds regular investors’ meetings. The meetings include explaining the financial status of the company (Solomon, 2011). Major potential conflicts of interest that may affect non-executive directors There are major potential conflicts between the non-executive directors and the executive directors. The conflicts include determining the average wage of the line and staff employees. Some of the executive directors may prefer to give more promotions and higher salaries to the employees. On the other hand, some of the non-executive directors may prefer to lower wages to the newly hired employees. Some of the executive directors prefer to lesser employee promotions. On the other hand, a handful of non-executive directors may prefer more employee promotions (). Further, another conflict is choosing the best marketing strategy. The executive director may choose selling the grocery items at reasonable prices. On the other hand, a non-executive director may prefer to sell the grocery products at the same price as the competitors’ average price. Another non-executive director may prefer to sell the quality products at high prices. The high prices are needed in order to recover the cost of manufacturing the grocery products (). Furthermore, a third conflict includes determining whether to set up a branch in one location. A fourth conflict is the hiring of an external auditor. The executive directors may decide to retain the auditing services of the current external auditors. The basis could be that the current external auditors had done very excellent prior external auditing service. On the other hand, the non-executive director may insist that the company hire a new external auditor (). Further, one of the reasons can be that changing the external auditors prevents the cropping up of a relationship between the external auditors and the company, J. Sainsbury. A friendly relationship between the external auditors and the company’s officers may contribute to the external auditors’ allowing the company’s accountants to prepare fraudulent financial reports. On the other hand, constantly changing the external auditors will ensure there is a dividing line between the J. Sainsbury’s accounting officers and the external auditors. Consequently, there is a danger that J. Sainsbury’s financial statement may fall in the same fraud predicament as Enron and Worldcom (Solomon, 2011). Also, the corporate governance code ensures that the company’s activities must comply with the corporate social responsibility (https://www.frc.org.uk/). The corporate governance provisions include implementation of standards of good board of directors’ management practice. The provisions include ensuring the company’s resources and people are effectively organized to attain prescribed organizational goals and objectives. The provisions also include requiring the board of directors implement the minimum wage provisions of the United Kingdom labor law. The employees shall be paid a salary that is not below the minimum hourly rate mentioned in the United Kingdom labor laws. The non-executive directors must persuade the executive directors to implement all the provisions of the United Kingdom labor laws and business laws. Additionally, the nonexecutive directors shall persuade the executive directors to establish a viable open communication relationship with the different stakeholders. The board of directors shall schedule seminars to explain to the stakeholders the different expansion plans of the company. The stakeholder meetings will discuss the benefits and profits generated from the currently implemented value chain strategies (https://www.frc.org.uk/). Further, the stakeholders’ meeting will include explaining each account listed in the financial reports of J. Sainsbury. For example, the accountant will discuss how J. Sainsbury generated the £ 22,294 million for the year ended March 2012. Likewise, the accountant can explain how J. Sainsbury generated its £ 874 million gross profit as of March 2012 (https://www.frc.org.uk/). Further, I feel that the no-executive directors are continually fulfilling their duties to satisfy the needs of the diverse J. Sainsbury stakeholders. The nonexecutive directors monitor and prod the executive directors to implement the provisions of the corporate governance provisions. As proof, the financial statements show that the company was able to generate profits during the 2012 accounting period. The company’s 2012 accounting period generated a £ 799 million net income (https://www.frc.org.uk/). Part 3 Ways that corporate governance in the UK could be improved The corporate governance in the United Kingdom can be improved. The principles-based accounting standards must comply with corporate governance provisions. The corporate governance and corporate social responsibility provisions represent the rules aspect of the United Kingdom accounting standards. Violations of the provisions will create a negative image of the company. For example, J. Sainsbury will be legally charged for violating the environmental laws of the nation (Solomon, 2011). Further, the corporate governance policies prohibit throwing the grocery chain’s waste products into the nearby crystal clear rivers. Doing so will pollute the clear river. Consequently, some or all of the river’s marine life may suffocate from the trash. Further, the accounting personnel should not permit the cashier to pay below minimum wages to the company’s newly hired employees. The accounting personnel must persuade management to comply with the minimum wage laws. J. Sainsbury’s management should incorporate the corporate governance provisions in the preparation of the financial reports (Solomon, 2011). Further, requiring the companies, including J. Sainsbury, to incorporate the corporate governance provisions in the work place will enhance the preparation of the financial reports. The stakeholders will have a favorable picture of the company’s business image when the company implements the provisions of the United Kingdom corporate governance code (Solomon, 2011). Lessons to be learned from other nations There are lessons to be learned from other countries. The United States Enron scandal is a vivid picture of how rules based accounting was instrumental in closing down Enron (Bauer, 2009). The Enron accounting officers and management connived with the external auditors. The connivance resulted to the external auditors’ agreeing to Enron’s presentation of fraudulent financial reports. The Enron financial statements presented unrealistic net profits. The company did not present its liabilities in the financial reports. Consequently, the stockholders’ equity account of United States entity, Enron, was fraudulently overvalued. With the overvaluation, the stakeholders were fraudulently misled. After one of the Enron’s employees divulged the fraudulent transactions, the true financial state of Enron was uncovered. Further, the true financial report showed that the company generated unfavorable net loss outputs during the past years. With the truth uncovered, the stakeholders left the company. The officers of Enron had no other choice but to file for bankruptcy. Similarly, the external auditors also closed shop. Several affected stakeholders filed charges of fraud against both Enron and its external auditors. The fraudulent external auditor was Arthur Andersen. Likewise Worldcom was another fraudulent United States company. Worldcom violated United States Federal law on financial improprieties. The company also connived with its external auditors to present fraudulent financial reports. Consequently, the discovery of the fraud precipitated to the Bankruptcy of Worldcom on August 2002 with charges that the company overstated by over $3 billion earnings (Fernando, 2009). Furthermore, the rules based United States accounting standards was instrumental in the closing down the two erring United States companies. The rules are fixed. Thus, the two fraudulent companies were penalized for violating the rules in the preparation of the accounting principles. Implementing the rules in the implementation of the principles-based accounting will reduce possibilities that accountants and companies will fit the financial statements to fit the demands of some stakeholders, creating unfavorable effects on the other J. Sainsbury stakeholders. References: Bauer, A. 2009, The Enron Scandal and the Sabarnes-Oxley Act, Grin Press, London. Fernando, A. 2009, Business Ethics, Pearoson, London. Jeffrey, C. 2011, Research on Professinal Responsibility and Ethics in Accounting, Emerald, London. J. Sainsbury, Financial Reports. Retrieved January 10, 2012 from McPhail, K. W.2009. Accounting and Business Ethics, Taylor & Francis, London. Solomon, J. 2011. Corporate Governance and Accountability, J. Wiley & Sons Press, London. U.K Corporate Governance Code. 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