Accounting Methods, Structure and Regulation of Greece with the UK - Essay Example

Critically compare and contrast the accounting methods, structure and regulation of Greece with the UK. Include a detailed and critical analysis of both current Introduction Accounting standards between countries are different owing to environmental factors. The factors are currency stability, legislation, separation of ownership and control, quality of management, size and complexity of firms, speed of innovation, economic development and education. (Mueller 1968) Although international accounting community aims to harmonise accounting standards internationally, few countries are ready to shed their own standards. This is in alignment with what is called contingency theory in accounting. "Contingency theory is based on the premise that there is no universally appropriate accounting system which applies equally to all organisations in all circumstances; instead, the optimal management control system depends on the specific elements of an organisation's environment. Effective control systems are usually situation specific and tailored to the management of each organisation. The exercise of managerial choice and the interdependence of accounting systems and the environment are acknowledged". (Rayburn and Rayburn (1991, p. 57) Greek accounting principles underwent changes following Fourth Directive of EC in 1987 while that of U.K. remained the same. Facts U.K. follows common law whereas Greece follows codified law falling under British Commonwealth and continental Europe respectively. "Greek law is based on codified Roman law with the judiciary divided into civil, criminal, and administrative courts. Judicial independence is guaranteed under the constitution" (Greece Profile) Many countries' accounting practices are influenced by their respective income taxation rules ignoring any other broader objectives. (Nobes 1983, Purcel & Scott 1986) In the case of Government bureauracrats setting the accounting standards, they are unequivocal in fixed formats. ".Bureaucracies are more likely to want certainty to make assessment of taxes, adherence to regulatory rules, etc., easier to specify and enforce" (Robinson, Chris, Venieris, george 1996) Greece Accounting and UK Accounting comparison Greek accounting is guided by its Corporate Law 2190/1920, accounting standards stipulated by the Ministry of National Economy, the interpretations issued by the National Accounting Standards Board (ESYL) and the Greek General Chart of Accounts approved by Presidential Decree 1123/80. In UK, the Companies Act 1985 as amended for EU Directives.lays down the stipulation for accounting methods. As per the Act, there should be disclosures that accounts are as per the standards of the Accounting Standards Board and urgent issues task force. Cash flow reporting in Greece Cash flow reporting as per IAS 7 became mandatory in 2002 for Greek listed companies which should submit the Cash Flow Statement (CFS) to HCMC though not required to be published as in the case of balance sheet and income statement. A recent study found that while non-listed firms do not voluntarily report CFS, the listed firms also do not comply with the mandatory requirement and make the CFS publicly available." The results indicate that Greek companies have cash flow problems but not profitability problems. The publication of a CFS may reveal that many listed companies in Greece are not as robust as the balance sheet and the income statement potentially indicates. Thus, the main conclusion of the paper is that publication of the CFS in Greece should become mandatory. The HCMC has made significant attempts to enforce corporate governance principles for listed companies in Greece. These principles implicitly highlight the desire of the regulatory authorities that investors receive adequate and relevant information. Could it be, however, that investors get relevant information when they do not have the essential inputs required to value a company"(Kousenidis V, Negakis L, Floropoulos) This practice of providing information on sources and application of funds was established in U.K. in 1975 itself through SSAP 10(ASC, 1975) as a funds flow restricted to only working capital changes and not cash flow. False Financial Statements (FFS) Accounts are falsified by inflating assets value, sales revenue or by undervaluing liabilities, expenses with a view to show more profit than actually earned. This is management fraud in terms of showing picture of the companies to the shareholders and stake holders. In Greece, falsification is generally resorted to reduce tax liability on one hand and to show more profit by companies in their attempt to enter stock matket.on the other. FFS in Greece are identified by auditors' remarks on depreciation, prediction of payment defaults, employee terminal benefits, engagements with other companies, and fiddling of accounts to evade tax. Analysis of 38 FFS firms and 38 non-FFS firms in the manufacturing sector in Greece showed that managers indulged in fraudulent reporting by selecting different valuation methods for different variables such as sales, accounts receivables, allowance for doubtful accounts, and inventory in order to hide their fraudulent actions. Difficulties in audit respect of uncollected sales and obsolete inventory were experienced by the auditors. (Spathis T) Creative Accounting in Greece A study on Greece by Baralexis S (2004) states that creative accounting a euphemism for falsification of accounts is widespread in that country. "creative accounting or earnings management is defined as the process of intentionally exploiting or violating the GAAP or the law to present financial statements according to one's interests. Such a definition denotes that there are two kinds of creative accounting: the legitimate, and the illegitimate. Both kinds can be practiced by companies at the same time". (Baralexis 2004) The Greek companies adopt creativity in accounting different from that of U.K. due to environmental factors. The creative accounting practiced in Greece is however being controlled by Greece law from time to time. Now the accountant is responsible for signing of the statements as per L 2873/2000 article 38 and as per L876/79 article 1, 35 % of the annual earnings or 6 % of share capital whichever is higher must be paid to share holders. Further yearly depreciation charges are compulsory but additional depreciation is not allowed in Greek law. Thus it has been observed there is tendency in Greece to both overstate and understate profits depending on the big and small segment of the companies they belong to. Profits are overstated mainly to attract capital from market and financial institutions. Small companies understate profits to avoid payment of higher taxes though they depend on financial institutions which however rely other sources than financial statements for financing them. Disclosure requirements Both countries of U.K. and Greece have regulatory requirements to follow. In Greece Law 2992 of 2002 has permitted Greek Companies to follow International Accounting Standards for their reports purposes in Capital Markets with effect from January 2003. Companies have to file annual, half yearly and quarterly reports to be reviewed by an auditor every six months. Financial statements must be published in two daily news papers under political and economic categories besides the Offical Gazette. (disclosureresource.com). Audit requirements in Greece Double-entry book-keeping became mandatory in Greece from January 1, 1993 for all companies. The books required to be maintained by companies limited by liability, branches of foreign companies and corporations must be authenticated by tax authorities. Accounting/financial year can either end on June 30 or December 31. Branches and subsidiaries of foreign companies can follow the financial year of their parent companies. Balance sheet should be submitted within four months of the year-end by corporations and six months by branches of foreign companies, three months by limited liability companies and all others like sole proprietors. Financial statements for companies with annual turnover exceeding Dr 180 million should be signed by the qualified accountant with five years related experience after receipt of the diploma prescribed the Economic Chamber of Greece or Accountancy Department of Business Administration and Economy School of the Technological Education Institutes. Account books must be retained for six years after 1991. Earlier it was 15 years and 11 years for documents and vouchers and in all the cases subject to the books being maintained for a longer period in case of disputes till their settlement. Penalties are levied for non-compliance and false accounts. The statutory auditor must give an interim report that all required information and explanations were obtained, activities at branches if any have also been received, cost of production is maintained and there were no changes in the valuation methods from that of previous year. (Price waterhouse Chapter 11) Accounting principles and practices in Greece Greece has no standard-setting body as such for accounting though there are not much difference from International Accounting Standards and the accounting practices are guided by the Corporate law of that country and subject to EC directives. However as there is no local standard setting body, the following practices have evolved over time. Any deviation from that prescribed by corporate legislation must be mentioned in an appendix as notes to the financial statements. Adjusting assets against liabilities is not allowed. Depreciation accumulated or amortised must be deducted from the value of the respective asset. Encumbrances on fixed assets should also mentioned. Amounts due from share holders and directors should be shown. While accounts titles must be descriptive, unrelated item can not be taken to an account and comparative figures of the previous period should also be shown in the statements. The Income statement should be in vertical form along a separate statement for profit appropriation. In the Balance Sheet, shareholders' capital as first item on the credit side should be shown at par value, along with excess of par value, difference on revaluation, reserves, retained earnings balance, current year's profit and accumulated deficit if any and deposit for future capital increase. In case of stock buy-backs, equivalent reserve must be created out of profits and should be shown separately in the Balance Sheet. Asset valuation is mainly on historical cost basis. for bonds issued by Greek State and banks and bonds mortgaged. Other marketable securities are valued at lower of the cost or prior period valuation and the average price for the last 15 days. Equity investments in other companies as participants are valued at the lowest of the cost or market value or value in the last balance sheet. Differences if any shall be taken to income statement in the current year. Inventory is valued at cost or market price whichever is lower. Plant and machinery and property are shown at actual cost or legal revaluation less depreciation. Lease rentals are treated as operating expenses. Government grants for fixed assets shall be shown as a tax-free reserve. In fixed asset account, the subsidised portion is not depreciated. Preoperative expenses are written off in the year incurred or amortised in five years in equal instalments. Acquisitions through shares purchase, cost of acquisition must be capitalised. Any good will resulting out of acquisition or mergers should be written off over the next five years in equal instalments if not in one go in the first year itself.(Price waterhouse Chapter 12 ) United Kingdom UK companies have wide ownership with multinationals and medium sized domestic companies listed in London Stock Exchange. The urge to grow by earning more and more profits has led to the development of UK accounting practice. Unlike Greece's, UK accounting practice have developed independently of tax law requirements. This results in minimal differences in Greece accounting between tax and real accounts whereas in UK reconciliation between tax accounts and statutory accounts have to be resorted. Standard setting in UK commenced in 1970 when Accounting Standards Steering Committee was set up by the Institute of Chartered Accountants in England and Wales(ICAEW). In UK it is not required to carry out procedures for appropriation of profits as in Greece. FRS 1 require cash flow statement for all entities except for small companies as defined in Companies Act 1985 and subsidiary undertaking, pension funds, building societies, mutual life insurance companies. The Directors report must inform company's principal activities and that of its subsidiaries during the financial year and significant change during the year if any besides future plans, post balance sheet events. and dividend recommended if any. Current assets are defined by the Companies Act 1985 under schedule 4 as the one not intended for the company's continuous use without restriction that assets must be consumed within a given period. Current assets can be transferred to fixed assets at lesser of the values of cost and net realisable value. Companies Act of UK requires to mention debtors due for or after one year in terms of value separately in the balance sheet. Similarly liabilities are classified as due within one year and due after one year. The loans shall also be classified as within one year or otherwise as per the rights the lenders can exercise for demanding back the loans. Amounts due after more than five years has to be shown as a disclosure. Current liabilities may not include provisions for liabilities and charges. Deferred income within one year or after one year can be shown separately as part of creditors or a separate line as a deferred income on the balance sheet. The good will can be now capitalised as asset assuming its economic life for 20 years or less. But it can be shown for a longer period with proper justification. Negative goodwill if any should be shown under positive goodwill and net amount alone need be shown on the balance sheet outer column. In UK an internally generated intangible asset can be capitalised provided there is a market value available for ascertainment. R & D cost costs can be deferred for future periods for which the development benefits will accrue. Preliminary costs can not be capitalised but can be written off against share premium account.. Tangible fixed assets are shown at recorded cost. The fixed assets can be revalued. Interest on borrowed capital can be added to the asset cost. UK GAAP permit both straight line and reducing balance method of depreciation or any other method of depreciation. UK Company act does not prohibit values being shown in another currency.( Crampton, Dorofeyev, Kolb, Meyer-Hollatz) Conclusion With the advent of International Financial Reporting Standards (IFRS) being implemented from 2005, the differences in accounting standards between countries will be narrowed down considerably. In fact Greece has been one of the countries to have opted for an earlier implementation of IFRS. As the countries are expected to implement convergence of their own standards with that of IFRS at the earliest, the problems arising out of differences in accounting standards affecting globalisation and cross border transactions especially in mergers and acquisitions, and due to creative accounting and false financial statements practices will be minimised in due course. Even the non corporate bodies will take a cue from the benefits out of IFRS and voluntarily opt for the IFRS. References Baralexis Spyros University of Macedonia, Thessaloniki, Greece Creative accounting in small advancing countries The Greek case Managerial Auditing Journal Vol. 19 No. 3, 2004 pp. 440-461 retrieved from www.emeraldinsight.com/0268-6902.htm on March 25,2007 Crampton Adrian, Dorofeyev Sasha, Kolb Susanne, Meyer-Hollatz Wolfram, European Comparison : UK and Germany Deloitte & Touche. Disclosuresresource.com retrieved from , on March 26, 2007 on March 26, 2007 Greece Profile (2006/April). Cambridge, England: World of Information, 2006. p 161.http://site.ebrary.com/lib/britishcouncilonline/Docid=10120805&ppg=3 Kousenidis V. Dimitrios, Nagakis I Christos, Floropoulous N Lordanis Disclosure requirements and voluntarily reporting of cash flow information in Greece Mueller, G. (1968). Accounting principles generally accepted in the United States versus those generally accepted elsewhere. International Journal of Accounting, Spring, 91103 Nobes, C. (1983). International classification of financial reporting. London: Croom Helm. Price Waterhouse World Firm Services BV, Inc. 1998 Chapter 11-Audit requirements and practices Price Waterhouse World Firm Services BV, Inc. 1998 Chapter 12 Accounting Principles and practices Purcell, T., & Scott, J. (1986). An analysis of the feasibility of harmonizing financial reporting practices between member countries of the EEC and OECD. International Journal of Accounting, Spring, 109-131 Rayburn, J.M. and Rayburn, L.G. 1991, 'Contingency Theory and the Impact of New Accounting Technology in Uncertain Hospital Environments', Accounting sAuditing and Accountability Journal, Vol. 4, No. 2, pp. 55-75 Robinson, Chris, Venieris, George June 1996 Economics, culture, and accounting standards: A case study of Greece and Canada Revue Canadienne des Sciences de l'Administration Spathis T. Charalambos Aristotle University of Thessalonikki, Department of Economics, Division of Business Administration, Thessaloniki, Greece ' Detecting false financial statements using published data: some evidence from Greece. Managerial Auditing Journal 17/4 [2002] 179-191 retrieved fro on March 27, 2007 Read More