Week One Discussion Questions - Essay Example

Week One Discussion Questions Accounting is not simply the reporting of the hard financial data that tells a company where it stands financially or merely serve as a reflection of where the company has been. Accounting must also guide the corporate finances, while anticipating revenue, expenses, and myriad other factors that impact the value and performance of a firm. To look forward and predict the financial events that will occur in the future the accountant uses estimates. Significant estimates will be used to anticipate revenue, growth, labor requirements, and plan investment strategies.

Without these estimates, it would be impossible for the company to make the changes necessary today to keep the companys finances on solid ground tomorrow. By the time the hard data was in, it might be too late. Many stakeholders, internal and external, rely on a companys accounting estimates as a basis for the decisions that impact their business activity. Shareholders may make a decision to buy or sell. Vendors may increase or decrease the production of raw materials. Plans for expansion may be made based on revenue estimates.

For these reasons, it is imperative that the accountant provides an accurate, and ethical, estimate based on the information available. There may be a temptation to exaggerate, overlook, or manufacture the data in an effort to unfairly benefit a specific stakeholder, such as the case at Enron and its unethical practices. The Sarbanes-Oxley Act, passed in response to Enrons unethical and deceptive estimates, now requires all publicly held companies to have a "financial expert serving on its audit committee" and have a set of "written standards reasonably designed to deter wrongdoing" (Green, 2005, p.239). 2.) Internal controls are a set of processes and procedures that a company has in place to protect and insure solid management practices, and reduce the potential for unethical activity.

Internal controls help prevent a careless, intentional, or malicious act from impacting the company in a negative fashion. For example, requiring that two different people sign all checks can help prevent the unauthorized use of a specific bank account. In addition, multiple experts, that can all agree and form a consensus as to their probablility of being accurate, should review all estimates. Internal controls are generally placed at points of transactions where money and goods are most at risk.

The accounts payable account could be at risk if a malicious employee manufactured false invoices to be paid to their personal account. An internal control could require that all invoices be matched to the companys bill of lading or a receiving log. As long as there are human beings that have access to a companys money and assets, there will be the possibility of incompetence, corruption, and greed. Internal controls help to reduce or eliminate the potential that money and goods will be stolen, misused, or accidentally misplaced.

In addition, these controls enhance investor and shareholder confidence in the firm. Failure to have adequate internal controls recently resulted in the second largest bank in France incurring a 4.9 billion Euro loss because a rogue employee was allowed to make unauthorized stock trades without adequate oversight. This loss was directly attributable to a lack of internal controls (Blanch, 2009). The bank lost considerable share value and had its credit rating significantly reduced. Involving multiple people in key decisions would have been a simple internal control that could have prevented this loss.

ReferencesBlanch, R. (2009). Jerome Kiervel-Societe Generale case. Retrieved April 15, 2009, http://www.hg.org/article.asp?id=6028Green, S. (2005). Sarbanes-Oxley and the board of directors: Techniques and best practices for corporate governance. Hoboken, NJ: John Wiley & Sons, Inc.