Financial Reporting Regulations - Example

Insert your name here] [Insert professor’s name here] [Title of the course] [Date of submission] 1.1. Executive summary Accounting theories and regulation of accounting have evoked controversial debates to the already disintegrating national accounting system of various states in America. Based on theories such as Management Branch of stakeholder, Ethical branch of stakeholder and Gray’s accounting values among others, the International Accounting Standards Board (IASB) have been attempting to coin a comparable financial reporting across the board. This is a typical example of accounting regulation which posses question whether it has managed to achieve unified regulatory framework for financial reporting. Based on the above approach, this paper examines behavioral approach of accounting practitioners towards the theories and regulation of accounting in America. Such will attempt to draw the argument from a case study of Acadia Pharmaceuticals annual report. Based on this Company, the report intends to achieve the above thesis statement by analyzing a description of the financial reporting environment in the United States of America and description of the financial and non-financial reporting undertaken by Acadia Pharmaceuticals. Table of contents 1.1. Executive summary 1.2. Introduction 1.3. Description of the financial reporting environment in the United States of America a. Historical events that have led to the current financial reporting requirements for publically listed companies b. The cultural influences on financial reporting in the USA c. Political processes that are influencing the setting of accounting standards in the USA d. Outcomes of the move by the FASB and IASB to converge IFRS and US GAAP into a global set of accounting standards 1.4. Description of the financial and non-financial reporting undertaken by Acadia Pharmaceuticals a. The information provided in the annual report b. Additional reporting undertaken by the company c. How the financial reporting environment in question 1 and the company’s stakeholders appear to have influenced the choice of Acadia Pharmaceuticals 1.5. Conclusion 1.6. List of references 1.7. Appendices 1.2. Introduction Acadia Pharmaceuticals is a U.S. based publically listed Company with its operation similar to environments operated by any other pharmaceutical industry within the country. Annual reports for 2008, 2009, 2010 and 2011 produced for its stakeholders has been cornerstone for the analyses of its historical events that can be said to have led to the current financial reporting requirements for any publically listed companies, cultural influences on financial reporting, political economies influencing the setting of regulation standards and the implications of FASB and IASB to converge IFRS and US GAAP into a global set of accounting standards. Based on the information from its financial reporting, the purpose of this paper is to carry out extensive analysis on two broad categories of issues; analyses of financial reporting environments within United States of America and non-financial and financial reporting that Acadia Pharmaceuticals has undertaken. Within these categories, the scope of the study considers other financial reporting of other Companies related to Acadia. This will closely encompass accounting theories such as Cultural, Regulatory, Ethical branch of stakeholder and Gray’s accounting values. Difficulties or limitations experienced during the research include inability by the companies to reveal information they have considered as risk factors in their financial report. Such is the inability by Acadia to reveal crucial information such as the imposed healthcare regulations which makes it difficult for the company to show other financial details necessary for analysis. Working towards its objective, the paper has assumed that application of Theory of Planned Behavior as argued by Ajzen (1991) which can be used to determine early adoption of IFRS is able to investigate whether subject norm and perceived control of IFRS adoption can indeed influence how IFRS can succeed with its early adoption. And finally is to look at the implication of issues raised above and conclusions on how companies strive to achieve the objectives of the accounting convergence. 1.3. Description of the financial reporting environment in the United States of America a. Historical events that have led to the current financial reporting requirements for publically listed companies A good example of historical event that has been highlighted is the fraudulent financial reporting. According to Beasley et al. (1999) financial reporting requirement by publically listed companies came as was triggered by increased number of fraudulent financial reporting. They argue that in 1987-1997 alone, United States registered 286 such cases. Vast of publically listed companies continued to provide financial reports that contained what they term as, “misstatements” (p.67) resulting in an average of 17.1 percent abnormal stock price. An example of such cited companies include Enron and WorldCom. Ethical branch of stakeholder theory argues that there are acceptable or prescribed financial statements that stakeholders ought to be served with. When this theory is negated and such fraudulent activity is noted then effects such as delisting from a stock exchange is experienced by such companies. In this regard, Securities and Exchange Commission (2003) argued that where there is comparability, not only will fraud be eliminated but there will be increased usefulness of accounting information. Another event claimed to have sparked financial reporting requirements for publically listed companies is the leverage. FASB, (2010) argue that from history, listed companies with higher leverage are always expected to comply with the requirement so as to curb agency costs and to assure debt holders that they have their interests protected. This could be the reason why Acadia complies with IFRS because of its higher leverage meaning that by definition, it has fewer shareholders and most likely, less equity. Historically, liquidity has been argued to be the reason for the disclosure compliance. Wallace and Naser (1996) explain that IFRS and shareholders are concerned with the operations of their listed companies. The same view is shared by Acadia Chief Executive Officer, Mr. Uli Hacksell. He argues that Acadia had to comply with the requirement because it is through such disclosures that its operations will reveal whether the company is able to its short-term commitments without compromising or liquidating its fixed assets. Ownership structures have also historically determined whether a listed company should disclose its financial information. Ownership structure with Acadia comprises of three groups; groups, agencies and government. When a company has such structure then these people always influence quality and level of disclosure thus complying with regulations. b. The cultural influences on financial reporting in the USA As defined by Cohen and Krishnamoorthy (2004) it is collective programming within an institution that has influence in national accounting practices. Research on how cultural difference influence financial reporting is also well documented by IASB, (2010). IASB argue that there are four common organizational dimensions that can determine financial reporting of companies. These can be; Large versus small power distance, strong versus weak uncertainty avoidance, long term versus short term orientations and indulgence versus restraint. They add that without interventions such as the one imposed by IASB, the four mentioned culture can determine financial reporting in many organization within the country. Taking Acadia for instance, cultural differences that have shaped their financial reporting are the environmental factors as well as micro level cultural factors related to how accounting factors are applied. Under revenue recognition, Acadia pharmaceuticals annual report (see appendices 1), the chief executive officer Mr. Uli Hackshell admits that organization culture dictates how they report their finances. He mentions that the nature of their business ownership and financing systems has implication on the company’s revenue recognition thus affecting their methods of accounting under the collaboration agreements. c. Political processes that are influencing the setting of accounting standards in the USA Argument regarding this case has a typical example in United States’ firms. Setting of accounting standards encounter challenges from incumbent regimes and the political processes of the day. Let us take the case of the New York Stock Exchange with a trading floor versus the computerized stock exchange at Cincinnati. These alternative sets are public goods and therefore the standards set to be followed must be arrived at by certain political choice mechanisms. To this effect Zeff (2005a) reports that current accounting standards leave many issues of financial reporting in hands of regimes and while setting standards, legislative system always elect a member to be present to speak on behalf. Such individual always accepts set codes if it is feasible within their rule of order. As a matter of fact, Tweedie reports that during the IFRS conference held in Tokyo FASB and Financial Accounting Foundation has been built around how much exposure and discussion memoranda the organization issued to the government during their sittings. d. Outcomes of the move by the FASB and IASB to converge IFRS and US GAAP into a global set of accounting standards The decision by United States’ Securities and Exchange Commission to converge with international Financial reporting Standards (IFRS) have many implications on business activities in the country. To begin with, the decision will in a different way, impact external financial reporting in organizations. Acadia Pharmaceuticals forces its management to use more judgment in the process of making assertions intended to support its recording and measurement transactions. As a result, such has affected the Acadia’s external financial reports. The next effect looks at it from historical cost accounting theory. In this regard, the experience of adopting IFRS elsewhere was that there was no much impact on market ratings due to conversions of GAAP to IFRS. However, companies need to communicate to its people about the impact of IFRS on financial results so as to provide competitive advantage. The move will also affect how companies manage their internal management reporting. Through the statement made by chief executive officer, Acadia is now forced to revisit almost every financial model so as to confirm whether the assumptions they made conforms to IFRS. As a result, comparing its budgets and reporting for 2008, 2009, 2010, 2011 and 2012 much in terms of budgets and forecasts have been remodeled as a result of changes in reported financial results. The move is likely to trigger transparency in financial reporting. Unlike before, principle based reporting system stipulated by IFRS that demands consistent application across companies will increase clarity on financial reporting. In other words, IFRS requires that transactions be reported more on the basis of substance of company’s transaction instead of following complex reporting rules. 1.4. Description of the financial and non-financial reporting undertaken by Acadia Pharmaceuticals a. The information provided in the annual report The 2010, 2011 and 2012 reports begin with message from chief executive officer to their stakeholders. In the message, Mr. Hacksell informs stakeholders on the important progress they made in previous years. Such was update Phase iii program with Pimavanserin for Parkinson’s disease psychosis toward registration. Another update is on the advancing collaborative and discovery programs. On this, during the 2011 alone, the company advanced their AM-831 program for schizophrenia into phase 1 development in collaboration with Meiji Seika Pharma. The other important information contained in the report is the government regulation on the company. The report argues that research activities within the company have been greatly influenced by numerous governmental authorities in United States. Such regulations include federal Food, and Cosmetic Act. Marketing sales and distribution have also been highlighted in the report. It is reported that the company had no marketing, sales or distribution by the time of report. Within this sub-topic, the report highlights risks related to the company. Such risks include the failure by the company to obtain capital necessary to fund their operation. Item six of the report talks of selected financial data. The data has information derived from the company’s audited financial statement as well as the consolidated balance sheet at December 2010 (see appendices 2) also captured in the item six is the liquidity and capital resources. Lastly, the report has comprehensively reflected on its recent accounting pronouncements. These include quantitative and qualitative disclosures about market risk, foreign currency risk, financial statements and supplementary data and changes in and disagreements with accountants based on accounting and financial disclosure (see appendices 3). b. Additional reporting undertaken by the company The company has reported its continuous effort to collaborate with other institutions so as to facilitate its research on various areas. Such include its collaboration with Allergan to develop a new class of molecule product that can treat chronic pain. The company has also collaborated with Meiji Seika in attempts to discover components for treatment of schizophrenia. On intellectual property, the company currently holds about 46 issued U.S. patents and over 199 issued foreign patents, with all patents originating from the company. In addition to this, there are other 24 provisional and utility U.S. based patent in the name of application not to mention 142 from other countries. Information regarding the structure of the company has also been elaborated by the report. This has been detailed under board leadership structure. The company has an independent chair by the name Dr. Iversen. The company also believes in separation of position of their Chief Executive Officer and Board Chairman who reinforces the independence of the board in day to day operations. Highlighted in the report are different committees set to oversee various aspects of the company. Example of such committees is the audit committee operating in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. Also included is the report of the audit committee of the board of directors. c. How the financial reporting environment in question 1 and the company’s stakeholders appear to have influenced the choice of Acadia Pharmaceuticals Acadia Pharmaceuticals represents true picture of financial reporting environment as explained above. To begin with, the company holds one of the significant historical events that triggered current financial reporting requirements for publically listed companies. Such event is its leverage. The decision to choose this company was because it complies with IFRS since its leverage are high thus by definition, it has fewer shareholders and to such extent, less equity. On the other hand, relating the reporting environment as discussed above vis-à-vis its stakeholders, its ownership structure greatly influenced the choice. When companies have structures comprising of groups, agencies and government then it influence quality and level of disclosure thus complying with regulations. 1.5. Conclusion From the analyses above, it will be of importance to believe that converging accounting standards is of multiple benefits. Other than what the Acadia financial report can reveal, Sir. David Tweedie chairman of the International Accounting Standards also claimed that the more companies experience global economy, the more they need regulation in their accounting and auditing. Political processes and cultural beliefs that seem to setback the adoption of Accounting Standards should be regarded as minor obstacle as there are other issues such as perceived behavior and the subjective norms which seem to be strongly influencing decision making process in the United States. As a matter of fact, looking at the financial reports of Acadia Pharmaceuticals, there are financial stabilities after adopting the requirements as compared to before. Chief Accountant from Securities and Exchange Commission, James Kroeker argues that if U.S. operates without single authority over standard then the country might be caught up in what he describes as “race to the bottom” (p.56). Reference Lists Ajzen, I. (1991). The theory of planned behavior, Organizational Behavior and Human Decision Processes. Beasley, M. Carcello, A. and Hermanson F. (1999). Fraudulent Financial Reporting: 1987-1997, An Analysis of U.S. Public Companies. New York: COSO. Cohen, J. and Krishnamoorthy, D. (2004). The Corporate Governance Mosaic and Financial Reporting. Journal of Accounting Literature 13: 67–152. FASB, (2010). Conceptual framework for financial reporting, (Financial Accounting Standards Board). Floyd, N., (2010). An Interview with James L. Kroeker: SEC Chief Accountant. The CPA Journal. No 6, pp. 24-68. IASB, (2010). Conceptual framework for financial reporting, (International Accounting Standards Board). Securities and Exchange Commission (2003). Report Pursuant to Section 704 of the Sarbanes- Oxley Act of 2002. Washington, DC: SEC. Tweedie, D. (2010). IFRS in 2011 and beyond, 2010 International Financial Reporting Standards (IFRSs) Conference (Tokyo). Wallace, S. and Naser, K., (1996). Determinants of the comprehensiveness of mandatory disclosure in the corporate annual reports of firms listed on the stock exchange. Public Policy Journal, Vol. 16 (4). Zeff, S. (2005a). The Evolution of U.S. GAAP: The Political Forces Behind Professional Standards, CPA Journal, 56(8), 9-17. Appendices 1 Appendices 2 Appendices 3 Read More