Financial Accounting Assessment - Essay Example

ACCOUNTING by Student’s name Course code+name Professor’s name University name City, State Date of submission Part 1: Introduction Businesses all over the globe must incorporate ethics as one of the most fundamental aspects of their operations in all areas, especially in financial reporting and management. Ethics and moral judgment in an organisation must be upheld at all costs. Business ethics is very important so as to address high level scandals which have rocked the business communities to the point of causing extensive damage to the economy of not only the mother nation but on a global scale (Needles, Powers & Crosson 2013). Many of us in the business and in college have heard and studied the Enron Scandal among others. From this perspective, it shows that as a business community, the corporate world cannot sit and perhaps watch as ethics is important in the overall performance and the public image of a company. In this paper, we discuss critically, the role of ethics and judgment in financial reporting, key areas of judgment and its impact. A consorted effort is also done by looking at case studies of some of the well known accounting scandals and the impact they created. In this section, we take a look at the Enron and One Tel scandals. In this regard, it is imperative to note that ethics is an important aspect in auditing and the corporate sector cannot sit back and say that they are fine when they evade the moral question when dealing with their financial management. Part 2: The role of Ethics in Financial Reporting Some of the high profile fraud cases have put to doubt the moral standing of business players and more so accountants. Many have indeed conceded that the main contributors to declining accounting ethics in organisations are accountants. Ethics as a discipline talks of good or bad, right or wrong and it is the moral duty of all in the business to do what is right not only for the society but the organisation as well. In business sense, it will mean that a company maintains true and fair financial statements without, for instance, over valuation of the company or its stock (Week 3). To attract investors into the company and to a large extent, all shareholders to have trust in the organisation, there is need to cultivate nurture confidence in reporting financial position of an organisation. Financial statement of a firm looks at the data that represents financial figures in relation to historical, projected and current financial position so that investors and shareholders can rely on this information to make informed and good decisions. Therefore, it is important that firms are in compliance with regulatory frameworks while at the same time have good ethical reporting so that all concerned are able to confide in the regulatory frameworks and organizations that are meant to evaluate various accounting (Ferrell & Fraedrich 2014). The main organisations that monitor while offering regulatory frameworks may include Securities and Exchange Committees, Financial Accounting Standards Boards, Australian Accounting Standards Board (AASB 13) among others. From these frameworks, firms have fair, ethical and reliable financial reports to all investors and shareholders. By doing this, ethics in a business and financial reporting ensures that there is general trust in an organisation. Investors will not have confidence if there is a weak code of ethics among accountants in a firm for they become skeptical about the security of their investment (Week 3). In this perspective, accounting professionals must have strong ethical and moral reasoning as their decisions in regard to financial reporting can have major impact for individuals, corporations and even the economy of an entire nation. Ethics in the business environment do not only concern accounting and auditing aspects. Ethical issues will always go beyond business dealings and include cases where firms may need their auditors to do certain things when recording financial figures. A number of the well known frauds in the corporate world that involve accounting and fraud reporting did not begin in the accounting department but rather at the CEO level and then made their way to the accounting areas in the firms. Ethics in business should not be about creating an avenue for shrewd men and women to fleece the general public. The role of ethics in a business is to protect the general public from few individuals at the top of organisations who are keen on enriching themselves (Ferrell & Fraedrich 2014). Consider again the case of Enron, where the company went on to file bankruptcy statement using innocent Americans and their pensions so as to benefit the architects of this scandal that included high level managers in the organisation. When ethics in the society and even organisations fail to be the guiding principles, many turn to the government. In this regard, the role of ethics is to protect the general public and help the government to come up with regulatory frameworks that ensure that laws are followed to the later (Schroeder, Clark, & Cathey 2011). From historical account of the various financial scandals, the American corporate environment has bore the most brunt. Because of this, ethical application in a business ensures that all entities work closely together to oversight and report financial fraud as soon as possible so that they can cushion the nation and even the world from financial upsets and damages. Companies must ensure that they are able to cooperate with these regulatory bodies and comply with regulatory frameworks for the benefit of the public and the global financial positioning (Week 3). The role of ethics is not only confined to companies but it should be important for the players to ensure that they uphold ethical values in their practice. In this regard, we expect that public accountants to have ethical standards for their professional working. Accountants are therefore in a unique position based on the kind of work as they are trusted by all stakeholders in giving professional guidance and judgment so as to make decisions. Furthermore, they are depended on for their professionalism and to trust that enables them to maintain clients’ confidence. Therefore, accountants in whatever practice they engage in, whether private, public or corporate, must perform their responsibilities by upholding high ethical standards with objectivity, integrity and a strong zeal to safeguarding their client’s and stakeholders interest ahead of theirs (Needles, Powers & Crosson 2013). We cannot divorce ethics from an accountant because without this in mind, there is a possibility of being compromised by the very practices that they have trained professionally to do. Ethics are there to nurture the accounting profession to uphold moral values and aspects that will lead to good and reliable judgment in many areas of accounting like accounting standards that give proper representation of the right position of an organisation. In the final analysis, ethics will continue to be a key area of concern for accounting professionals, especially with the emergence of financial fraud in the corporate world. These scandals have had an impact on the overall auditing practice and have put to scrutiny how effective the current concepts in accounting and corporate world and practice. These are in no doubt some of the most important duties of the accounting profession. Part 3: Key Areas of Judgment in Financial Reporting For effective reporting by firms, the management must make estimates with clear assumptions so that they do not have an influence on the firm’s balance sheet in regard to all the financial aspects during reporting period (Week 3). It is important to note that most of the accounting standards are rules based as they contain rules for entities to follow when accounting for specific transactions. Again, it is important to note that accounting standards vary in their degree of specificity in that the more specific standards have a tendency to be classified as rules based while the less specific standards are classified as principle based. In this regard, accountants as professions are required in some instances and cases to use their professional judgment in developing financial reports that meet the principle objectives in providing real position for an entity’s economic position or condition. These areas of judgment in accounting are so important to the extent that poor judgment by professional accountants has the potential to damage the overall performance and image of the company. A number of areas must be considered before making a decision by accountants (Week 4b). Some of the areas include revenue and expenses recognition, assets and liabilities evaluation, evaluation of intangible assets, depreciation, extraordinary items, provisions, and shares’ evaluation. Accounting standards require sales and expenses to be recognised at the point of accrual and not when cash is received or paid. In this regard, the accountant is supposed to make judgment based on the rules and principles of accounting (Mackenzie et al. 2012). They should not entertain the thought of creative accounting that has the potential to over inflate revenue numbers. The question here should, how much of accounts receivable will actually be received. In this regard, the accounting process in the firm must have provision for bad debts as an expense. However, the accountant must make judgment on the size for this provision in consultation with the management. Provisions made and their calculation must be based on accounting standards. As stated, a fair valuation of assets and liabilities acquired must be reported at the measurement time. According to the Australian Accounting Standards Board (AASB13), market approach is the price value received when selling an asset or transferring a liability in the market involving relevant parties at the reporting time (Week 3). Thirdly, a fair valuation of intangible assets depends on the potential future cash flows that they can generate. In this regard, the approach used here is income based with a number of assumptions, for instance, useful life of the intangible assets (Hammersley 2011 Fourthly, decision must be made on the value of fixed assets in regard to their useful life and their depreciation. It is well known that the value of fixed assets depreciates over their respective estimated useful lives (Week 3). Judgment is needed in assessing the useful economic life and residual values for such assets so that depreciation expenses are charged on a systematic basis. Therefore, accountants must not underestimate the useful life or residual value of an asset as this leads to overstating annual depreciation expenses. Another key area of judgment is items which are non-recurring as they are supposed to be disclosed separately to avoid distortion of performance due to their size or nature. Therefore, the accountant in consultation with the management must identify these items and disclose their true value separately for professional outlook of the accounting process. In this regard, it ensures that there is true picture of the firm’s valuation (Peecher, Solomon, I., & Trotman 2013). Non- recurring items may include profits or losses on noncurrent items, and integration of acquired businesses. Other area in judgment is provisions as businesses are required to make their financial reports for reasons that include severance compensation, pending legal proceedings and bonuses and pensions. It takes the assumption that probability of success in the legal proceedings. Because of the uncertainties related to these assumptions, actual payments may vary largely from the original estimated provision (Week 4b). Conclusively, the management in consultation with the accounting department must have decisions on how to value financial aspects are observable in the current market situation. Part 4: Impact of Using Judgment in Accounting The impact of using judgment can be evaluated by looking at the importance of making these judgments and application of the guidelines. Making judgment in financial reporting has to potential to reshape accounting and auditing economically, legally and ethically (Steubs & Thomas 2009). Financial scandals in the last decade affected how judgment can be done in regard to accounting standards and principles. The American economy and indeed the whole world saw and felt the impact of the Enron scandal. Due to this, regulatory frameworks were developed but again complexities in these regulatory frameworks have created a wide gap in regard to reporting system and quality information so as to make reliable judgment on investment (Peecher, Solomon & Trotman 2013). This gap has created a complexity in financial reporting. This complexity has lead to ineffective communication in financial reporting and led to poor judgment by the accountants in their professional practice. Again, judgment based of the areas discussed has been hampered by the inefficiencies that have been caused by additional costs of regulation. Again, the reporting parameters have become complex to comprehend as this impacts on the legal understanding to the professions in the industry as incorporation of parallel views and good returns. They may also lead to inclusion of principles that do not have plain language and have guidelines that follow rules and specific patterns and make it possible to create dealings so as to have certain outcomes instead of disclosing the economic value of the item in question. Furthermore, the impact of using judgment has more far reaching effect on having to control the effect of many standards’ institutions over a certain period that will focus on inaccurate frameworks. Therefore, the impact of using judgment in the overall financial reporting and accounting standards will be effective if these complexities are reduced and a deliberate effort made to transition from standards based on rules to principles frameworks so as to necessitate an improved dependence on accounting judgment from the professionals (Stuebs & Thomas 2009). Part 5: Case Studies: ONE TEL and & Enron These are some of the scandals that hit the business world and brought in the reality that ethics, judgment and corporate governance were being subverted in the business world. ONE TEL was an Australian telecommunications company that was established in 1995 and filed for bankruptcy by 2001. The company engaged in high risk practices in a very competitive business environment. But perhaps the oversight in decision making by the board must have been the biggest undoing by the firm (Schroeder, Clark & Cathey 2011). Four of the nine seats in the company’s board were held by company executives and partners from Arthur Andersen, the same person who through his audit firm was paid millions of dollars but could not see that good ethical practices are carried out at Enron and even ONE TEL. The fact that the two firms had same auditing firm may not have only been a coincidence but it is an indication of how poor accounting standards and lack of ethics can lead to over evaluation of companies’ assets, liabilities and provisions for bad debts. Consider the case of Enron that went on to form partnerships with international firms so that they could hide their debt books and show profits that were non-existent. Furthermore, the executives in both companies ended up getting huge salaries , for instance in the case of ONE TEL, the founders were receiving hundred thousands of dollars and huge bonuses yet few months later, the company was declared (Week 3). Again, consider the case of Enron that went on to pay Andersen, through his audit firm, $ 52 million in 2000 for the majority of non-audited related consulting services (Ross 2002). Therefore, it was the failure of a professional audit firm that failed to assess Enron’s internal controls on derivative trading and expressed approval of internal controls during the period between 1998 and 2000. Therefore, the contribution made by Andersen was a clear demonstration that as financial management practitioners and professionals, accountants must ensure that they uphold ethical standards. There must also be simple regulatory frameworks that do not necessitate complexities that may lead to poor accounting and auditing practices in the business world. Bibliography Ferrell, O. C., & Fraedrich, J., 2014, Business ethics: Ethical decision making & cases. Cengage Learning. Hammersley, J. S., 2011, A review and model of auditor judgments in fraud-related planning tasks. Auditing: A Journal of Practice & Theory, Vol.30, No.4, pp.101-128 Kim, J. B., Liu, X., & Zheng, L., 2012, The impact of mandatory IFRS adoption on audit fees: Theory and evidence. The Accounting Review, Vol. 87, No.6, pp.2061-2094. Mackenzie, B., Coetsee, D., Njikizana, T., Chamboko, R., Colyvas, B., & Hanekom, B., 2012, Wiley IFRS 2013: Interpretation and Application of International Financial Reporting Standards. John Wiley & Sons. Needles, B., Powers, M., & Crosson, S., 2013, Financial and managerial accounting. Cengage Learning. Needles, B., Powers, M., & Crosson, S., 2012, Principles of accounting. Cengage Learning. Peecher, M. E., Solomon, I., & Trotman, K. T., 2013, An accountability framework for financial statement auditors and related research questions. Accounting, Organizations and Society, Vol.38, No.8, pp.596-620. Ross, G., 2002, Opinion, The Fat Cats of Business Keep Taking the Cream, THE AGE, Melbourne, Austl. Schroeder, R. G., Clark, M. W., & Cathey, J. M., 2011, Financial accounting theory and analysis: text and cases. John Wiley and Sons. Stuebs, M. T. Jr. & Thomas, C. W., 2009, Improved Judgment in Financial Accounting: A Principled Approach, The CPA Journal Vol.79, No.1, pp.32-35. . Week 3, Areas of judgment in reporting, Ethics Fraud and Auditing, Financial Management, PowerPoint presentation. Week 4b, Analysis of Financial Statements, TBS 801Financial Management, PowerPoint presentation. Read More