Accounting for Business- Role of Government Intervention, Board of Directors, and Auditors - Essay Example

Accounting for Business Contents Introduction 3 Role of Board of Directors 4 Role of Auditors 5 Role of Government Intervention 7 Conclusion 8 References 10 Introduction The accounting methods in business deal with the collection and summarization of financial information of companies on the first hand followed by subsequent analysis of the collected financial information for use of stakeholders of the business. The stakeholders who use the accounting information published in the financial statements may be internal as well as external to the company. They may be the management, employees, shareholders, clients, creditors, investors, etc. The generally accepted accounting principles and procedures adopted while preparing the financial statements of the business are aimed at providing true and fair disclosure of financial information of the company in the areas of revenue earnings, cost incurred by the business, profitability, turnover, asset base, share of liabilities, equity base, return of the shareholders, expected growth rate of the companies, risks involved in the business, present and future cash flows of the business, etc. The application of accounting methods and the preparation of financial statements are important for the stakeholders of the business as it helps them to take informed decision in the matters of the company. However, recent financial frauds have started to increase due to the lapse in accounting methods, unethical approaches of the accountants and auditors, etc. The role of the accountants and the auditors as well as the Board of Directors and the regulators has become crucial in the context of accounting. The recent financial scandals due to the lapses in accounting and auditing have led the regulators in various countries like UK to formulate laws and regulations to prevent the financial frauds by the businesses. The examples of Enron in 2001, WorldCom in 2001, Northern Rock in 2008 and RBS in 2008 are the financial frauds in the field of accounting that has led the regulators to formulate laws like the Sarbanes Oxley Act, 2002. Role of Board of Directors The Board of Directors has an important role to play in the prevention of fraudulent activities in the field of accounting. The appointment of the directors is an important part of the recruitment decisions made by the business. The companies look to appoint directors with rich experience in the industry and having proven track records of controlling the operations of the business and taking effective decisions for ethical business operations. The Board of Directors is the top layer of the business houses who is responsible to undertake strategies for fulfillment of the goals and objectives of the organization in short run as well as long run. The mission and vision of the organization are realized by the business strategies formulated by the organizations. The right appointment of the directors is, therefore, crucial to ensure that the strategies formulated by them are in line with the mission and vision of the business enterprise. Every organization that aims to attain sustainability in the business in the long term perspective resorts to ethical practices in the business (Fearnie and Beattie, 2004, p.118). The strategic policies implemented by the Board of Directors are aimed at maximizing the wealth of the shareholders. The Board of Directors also undertakes strategies that are directed to the restoration of brand image of the business. This develops an optimum level of trust between the shareholders and the business. The medium through which the trust is developed among the external stakeholder is through the financial information prepared by adoption of the accounting methods. In order to facilitate the process of true and fair disclosure of the financial information of the business to the shareholders, investors, creditors and customers, the Board of Directors should refrain from influencing the functions of the accountants and the auditors (O’Sallivan, 2000, p.412). The Board of Director should play the judicious role of ensuring the income generated by the business and the return on equity generated by the company is correctly represented in the financial statements. The Board of Directors should ensure that the employees and the management co-operate with the accountants and the auditors to provide them necessary and crucial information on the business activities and operations in order to prepare appropriate financial statements for disclosure in the annual reports. The Board of Directors should declare incentives for resorting to ethical practices in business, accounting and reporting (OConnor, Priem, Coombs and Gilley, 2006, p.499). The strategic measures for prevention of fraudulent activities in accounting would stop the activities of manipulation in accounting and preparation of financial statements. The Board of Directors would, therefore, be able to influence the approach of true and fair disclosure of company information, investment, operational and financing activities undertaken throughout the year. The return generated from the investments, level of debt incurred by the company, the level of gearing in the business, risks involved as reported correctly in the financial statements would help the users to interpret the financial information for taking informed decisions on the company matters. Role of Auditors The auditors have an important role to play in the prevention of frauds involved in the process of accounting and reporting of financial information of the company through the annual reports. The financial information collected and summarized by the accountants and presented in the form of financial statements is validated by the auditors before the same is published in the annual reports of the company. The roles and responsibilities of the auditor include the protection of the interests of the shareholders. The role of the auditor indirectly favors the cause of maximization of wealth of the shareholders (Patel and Psarros, 2000, p.315). The shareholders and the investors believe that the financial information published by the businesses have been validated by the auditors and that those represent a true and fair view of the financial position of the company. Thus the investors, shareholders, clients and the creditors trust the role of the auditors in validating the disclosure of financial statements of the companies. The auditor should, therefore, undertake due diligence in finding the gaps if available in the financial statements as compared to the actual daily operations in the business (Francis2, 2011, p.127). The auditors should collect the necessary information for explaining such gaps before validating the financial statement for the purpose of reporting. The efficiency of the auditors is crucial from the point of view of prevention of fraudulent practices in the field of accounting. The accounting and auditing scandals as found in the cases of Enron, WorldCom, Northern Rock and RBS have shown instance of auditing lapses due to manipulative measures undertaken by the senior management in these companies and unethical approaches adopted by the auditors in validating the financial statements of the companies. In order to cope up with the scenario of financial frauds in accounting, the auditors need to follow certain principles while validating the statement of accounts (Francis1, 2011, p.356). The auditors are required to work independently on the activity of identifying the gaps in the financial statements as compared to the day-to-day operations in the business. The auditors should ask for necessary information in order to be satisfied that there are no discrepancies in the method of accounting and preparation of financial statements of the company. The auditors should not come under the influence of the senior management for manipulation of the statement of accounts (Antle, 1984, p.48). The rotation of the individual auditors for carrying out the activity of auditing of the statement of accounts of the company is important from the point of maintaining the individuality of the auditors and avoiding the attempts of manipulation of the management. The quality of audit and the attention to minute details of the financial statements are important for presenting a true and fair view of the financial position of the company to the investors and the shareholders. Role of Government Intervention The financial scandals in the area of accounting and auditing of financial statements of companies like Northern Rock, HBS etc. has led to the depletion of the depletion of confidence of the investors which reflected in the declining performance of the stick indices and the fall of stock prices in the economy of UK. In order to prevent the financial frauds and restore the confidence level of the investors in the best interests of the financial market, the government intervention is necessary. The government has passed regulations with an aim to ensure true and fair disclosure of financial statements. These regulations are required to be complied by the businesses for protecting the interest of the investors and the stakeholders of the company. The UK Act of 2006 was passed by the policymakers in UK which requires the Directors of the business house to undertake activities in good faith and without negligence in order to ensure the best interest of the stakeholders and the investors of the company. The Act specifies the provisions on the power of the directors in case of matters related to the company (BALL, 2009, p.285). The Directors are not allowed to intervene in any manner in the work of the auditors and any attempt in undertaking such activities would be treated as an offence. The Act also mentions the liabilities of the auditors in cases of validation of the financial statement of accounts prepared by the accountants. The auditors are required to undertake their activities and ensure that ethical accounting practices are adopted in the preparation of the financial statements. The auditors should also ensure that the generally accepted accounting principles and the international financial reporting standards are followed in the course of preparing the financial statements (Bierstaker, Brody and Pacini, 2006, p.525). These regulations passed by the UK government would help in the reporting of true and fair view of the financial position of the business. The regulatory act also contains the provision of maintain high standards in the disclosure of financial statements of the business to the public through the annual reports. The Sarbanes Oxley Act, 2002 has been passed in order to streamline the preparation and reporting of financial statements in order to provide a true and fair view of the financial position of the company to the public investors and the stakeholders. Although government regulations have increased the compliance cost of the business, the protection of the investors have been ensured through the implementation of standardized method of preparation and reporting of financial statement of accounts of the business (Elsevier, 2005, p.125). Conclusion The accounting process in business includes collecting, summarizing and reporting of financial information of the company to the internal and the external stakeholders. The financial statements prepared through the use of accounting methods and reported through the use of annual reports carry important financial information on the company which is of good use for the investors and the stakeholders. Since the reported financial statements of the business are believed to be true and fair by the users, the decisions for investment, financing, etc are taken based on these financial statements. However, due to the occurrence of financial scandals and frauds, the lapses on the part of the accountants, auditors in preparing and validating financial statements have been found. In order to ensure the true and fair disclosure of the financial statements prepared through application of accounting techniques and validation by the auditors, the government has passed the regulations from time to time in order ensure ethical role played by the Board of Directors, auditors, etc. In 2002, the Sarbanes Oxley Act has been passed. The UK Act, 2006 has been passed by the UK government mentioning the power of the directors, auditors and the requirement of true and fair disclosure of financial statements. The duties and responsibilities of the Board of Directors involve undertaking activities in good faith and without negligence which are aimed at serving the best interest of the stakeholders. The auditors are required to ensure in the course of validation of statement of accounts that ethical approach in accounting has been followed and that the financial statement reflect the true and fair view of the business over the specified period of time. References Antle, R. 1984. Auditor Independence. Journal of Accounting Research. 22(1), pp.45-56. BALL, R. 2009. Market and Political/Regulatory Perspectives on the Recent Accounting Scandals. Journal of Accounting Research. 47(2), pp. 277-323. Bierstaker, J. L., Brody, R. G. and Pacini, C. 2006. Accountants perceptions regarding fraud detection and prevention methods. Managerial Auditing Journal. 21(5), pp.520-535. Elsevier, B. V. 2005. Whistle Blowing Regulation and Accounting Standards Enforcement in Germany and Europe—An Economic Perspective. International Review of Law and Economics. 25(2), pp.143-168. Fearnie, S. and Beattie, V. 2004. The reform of the UK’s auditors’ independence after the Enron collapse: An example of evidence-based policy-making. International Journal of Auditing. 8(2), pp. 117-138. Francis1, J. 2011. What do we know about audit quality?. The British Accounting Review. 36(4), pp. 345-368. Francis2, J. 2011. A framework for understanding and researching audit quality. Auditing: A journal of Practice and Theory. 30(2), pp. 125-152. O’Sallivan, N. 2000. The impact of Board Composition and Ownership on audit quality: evidence from large U.K companies. The British Accounting Review. 32(4), pp. 397-414. OConnor, J. P., Priem, R. L., Coombs, J. E. and Gilley, K. M. 2006. Do CEO Stock Options Prevent or Promote Fraudulent Financial Reporting?. Academy of Management Journal. 49(3), pp. 483-500. Patel & Psarros. 2000. Perceptions of external auditors’ independence: some cross- cultural evidence. The British Accounting Review. 30(3), pp. 311-338. Read More