UK and US Financial Reporting Ethics - Essay Example

Running head: UK and US financial reporting ethics. Is there any difference between UK accounting ethics standards and US accounting ethics standards Name: Student Ref: University: Course: Date: 1.0. Background a). Importance of the research. Due to the changes in the international market brought about by among others, the globalization phenomenon, it is becoming increasingly important that the accounting practices in the two of the world's largest economic blocs namely the US and the UK be scrutinized with the purpose of reconciling the major disparities between them. There are several reasons that strongly support this argument. For sometime now, the U.S. Financial Accounting Standards Board (FASB) and its international counterpart (IASB), have made progress in reducing these disparities between U.S. GAAP and IFRS. (IFRS) accounting rules are set to be followed by all public companies falling under the European Union but about 100 other countries are either already applying or weighing them up.In light of the changing nature of the international market, it is important that comparable transactions between competing companies in different regions be reported in the same way or the differences be understood by these companies so as to be able to understand the financial performance of a competitor. b). Literature scope. "Ethical values provide the foundation on which a civilized society exists." (Smith K, 2003). Managers are faced almost on a daily basis a multitude of decisions that have to take into account variables such as profitability, personal advantage and overall benefits to the community, in the overall context of the correctness of these decisions. However, if integrity is allowed to become one of the possible variables, then it is most likely that it will be the first to be sacrificed at the altar of expediency. The purpose of ethics therefore, is to encourage, " [persons] to abide by a code of conduct that facilitatespublic services" (Smith, K 2003). To that end, there are many accounting organizations that have come to realize the need to establish a practical set of ethical guidelines. The Institute of Management Accountants for example, have established an ethics hotline'. As part of the services offered, "ethics counselors offer confidential advice, solace and comfort to management accountants who may have no other place to turn to for help"(Smith, K 2003). It is not known whether there is are any similar arrangements within the United Kingdom, but there have been attempts to address the issue. This is evident from the response of the United Kingdom Share Holders Association's response to the ' Ethics Standards Board Consultation Paper' of May 2002. In this response, it clarifies the inter-se relationship between professional and corporate responsibilities. The report highlights that, "professional status is an implied contract: to serve society over and beyond all specific duty to client or employee in consideration of the privileges and protection society extends to that profession" (Setting the Agenda for Ethics, 2002). Moreover, many companies are now appointing ethics officers, charged with monitoring the ethical standards of their company as well as for uncovering fraudulent activities. This trend is also partly due to the Sarbanes-Oxley Act enacted in the United States in the wake of the Enron, WorldCom and other scandals. Scope for malpractice exists because accounting practices differ considerably from country to country and the nature of these practices can, and are, exploited through 'creative accounting'. The United States follows to concept of 'substance over form, while the European Union believes in giving a ' true and fair view' of a company's financial status. However, both concepts though in vogue, are subjective in nature and offer considerable scope for manipulation of figures. Depreciation in the United Kingdom for example, is determined according to custom, with "convention and pragmatism, rather than exact rules [determining methods of depreciation]." (Ferrari L, 2005). Such loopholes allow considerable scope for unethical practices such as 'creative accounting' or 'earnings management' that may be within the parameters of standard accounting practices in 'letter' but are not in sync with the 'spirit' behind these rules. Many of these differences also owe their origin due to the differing systems of taxation, finance and jurisprudence in vogue in each of these countries. In the United Kingdom, for example, shareholdings are likely to be comparatively more concentrated and controlled by a few institutional investors, resulting in lesser pressure for public disclosure. In the United States on the other hand, there are a large number of shareholders and consequently a larger number of people want access to a company's accounts to enable them to gauge that company's current and future prospects. Losses are reflected early in the United States, as managers do not want to face litigation. In the United Kingdom though, shareholder litigation being rare, companies are more likely to smooth over earnings throughout the year. It is this pressure of public disclosure and the overarching desire to always project the company in good light - so that its share prices are not affected - that leads to the insidious practice of misleading financial analysis. To remove many such anomalies, there is a concerted move to follow standard accounting practices all over the globe. Prior to 2001, the United States was not favourably inclined towards the International Financial Reporting Standards being developed in Europe, believing that its own Generally Accepted Accounting Practices were adequate. However, following the spate of accounting scandals, the United States, Securities and Exchange Commission, was compelled to "[endorse] objective oriented rules that are completely aligned with the principle based standards promulgated by the International Accounting Standards Board" (Eaton, S 2005). This shift in the United States stance has considerably narrowed down transatlantic differences in accounting practices. 2.0. Where project fits within literature. a). Objectives To determine the differences between the financial reporting ethics and standards in UK and US. To provide an up-to-date view regarding the effects of differing financial reporting ethics and standards Review the knowledge that exists on the subject with the view of providing an update. 3) Method. Methodology: Due to the inherent strengths and weaknesses in different techniques of gathering data, the researcher will use a multi-method approach combining both quantitative and qualitative techniques in the research in order to converge on a balanced conclusion. Qualitative technique will aim at generating more sensitive data and will employ questionnaires as the tool of data collection. Questionnaires will be drawn by the researcher and will be of a mixed format, that is, will have a dichotomous section, a multiple-choice segment and open-ended segment. The researcher will follow a laid down plan by creating a list of questions and arranging them according to the themes to be explored. To ensure reliability of the questions, they will be put to test also before they are finally sent through e-mail. The researcher will employ the services of an assistant whose main duty will be to provide any necessary logistical support. Quantitative analysis on the other hand will be used to test the hypothesis. SPSS software will be used to perform analysis on the quantitative data. Subsequently, inferential statistics especially correlation coefficient will be used determine the strength of relationship between the two chosen variables. . 5) Timescales: Schedule of Activities This study will take 21 weeks starting November 26th 2006 up to April 16th 2007. A. Problem identification B. Discussion of the problem C. Problem statement D. Literature review E. Designing questionnaire F. Collection of data G. Data analysis and presentation Activity 1 2 3 4 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 A B C D E F G H APPENDIX A. Research budget The project has a Budget, which will be shouldered by the researcher. Activity Item Units Cost/unit in $ Total cost $ 1. Familiarization tour Field travel Local assistance N/A N/A Sub- Total 2. Data collection On-line questionnaires N/A N/A Sub total 3. Primary data collection E-mail Allowances Days Days 7 03 Sub total Data analysis and documentation A4 papers plain Graph papers Typing services Duplicating Binding services 1 Rim Booklet 36 Pages 36 Pages 3 copies Sub total Consultancies Data Analysis 160 Questionnaires Sub total TOTAL References Dean, David F, and Bernadi, Richard A, "Accounting Ethics Courses: A Professional Necessity", The CPA Journal. Retrieved from http://www.nysscpa.org/cpajournal/2005/1205/essentials/p64.htm Eaton, Sarah, "Crises and the Consolidation of International Accounting Standards: Enron, the IASB, ad America". Retrieved from http://www.bepres.com/bap/vol7/iss3/art4 "Ethics Pay". Wall Street Journal, Sept 29, 1987, p1. Ferrari, Luciano Aldo, "Financial Reporting". Retrieved from http://www.consrag.it/aprofondiment/Financial%20accounting.doc "Setting the Agenda for Ethics". Retrieved from http://www.uksa.org.uk/Ethics_Standards_Board.pdf Smith, Dr Katherine T, "Business and Accounting Ethics". Retrieved from http://www.acct.tamu.edu/smith/ethics.ethics.htm Read More