Auditing and Fraud Issues 1. Explain what you understand by the term “information asymmetry”. Information asymmetry is a situation in which at least some relevant information is known to some but not all parties involved. For example, the manager generally has more information about the financial position of the corporation than the owners or the shareholders. This could prove to be a harmful situation because the party with the better information can have advantage against the one that does not have any information. Information asymmetry can lead to two problems. a. Adverse Selection: In this situation the person acts in the immoral behavior by taking advantage of asymmetric information before the transaction. For example, the person who is not in better a health is more likely to be inclined towards buying the insurance than the one who has better health. b. Moral Hazard: In this situation the person acts in the immoral behavior by taking advantage of asymmetric information after the transaction. For example, the person with fire insurance is more likely to set his own house on fire to collect the benefits from insurance. 2. What mechanisms does the accountancy establishment put in place to overcome the information asymmetry problem? The mechanisms that the accountancy establishment put in place to overcome the information asymmetry problem is disclosures and auditing. Disclosure rules for public companies diminish the problems of asymmetric information. The SEC requires companies that sell securities to the public to publish quarterly financial statements and disclosure of any relevant information in a timely manner. On the other hand audit provides credibility for the information presented which impacts on information value... ... middle of paper ... ...ant and marked in the UK. Since, UK is the country which has the greatest emphasis on equity funding and better regulation to support financial reporting, and is considered most like the US, sound expectations of the adoption of IFRS in the US based on this study, are that the cost of equity capital is likely to reduce in a similar way and very unlikely to be adversely affected. ACCA supports most of the Roadmap plans. As IFRS is inclining towards being more principals based ACCA thinks that the SEC should provide remedy to the gaps in standard. The examples of such gaps are covering the standards on the insurance and the extractive industries. Another area where SEC should work on is being tactful about the details on the application guidelines for different jurisdictions and providing details on the translation and legal incorporation issues for global standards.
Seiler. M, (1996) Adverse selection in capital budgeting decision making. Management Research News, 19(8), pp.61-67
The Securities and Exchange Commission requires that publicly owned businesses provide annual reports, which are available to the public. Many different people use annual reports, to make informed business decisions. Management from the company uses the information to determine a number of items. Some of these items are the profitability of the company, the inventory turnover rate, and the accounts receivables rate. Creditors use the annual report to determine how well a company can satisfy its current liabilities, as well as, how the company is doing in the aspect of long tem survival. Another group of people who use the annual reports furnished by companies are the investors, who can purchase shares of stock from the publicly company. Annual reports are very important to these people, because they are an over all picture to help them determine the over all stability and reliability of the company’s financial outlook. These annual reports are important because they do not only contain the financial statements of the company, but there is a management ‘s note to discuss reasons for any unexpected numbers, and an auditor’s report, from an independent accounting firm, who either agrees or disagrees with the financial numbers. Market reporter Matt Krant said, “Ignoring these reports is akin to driving down the freeway blindfolded.”
In the year 2002, Adelphia Communications Corporation faced a massive accounting scandal that led to company’s bankruptcy and later reorganization. This paper will attempt to identify, analyze and evaluate the consequences of misrepresentation of financial accounts on a company, industry and economic level. Moreover, it will attempt to examine factors influencing the corporate failure from an auditor’s point of view, and consider the measures that auditor could have taken in order to enable quality and completes of information communicated to external users.
Romney, Marshal, and Paul Steinbart. Accounting Information Systmes. 10th ed. Upper Saddle River: Pearson Education, 2006. 193-195.
Q1) Health insurance, whether provided publically or privately, suffers from the problems of moral hazard and adverse selection? How can health insurers get around these problems?
The limited ability of regulators to asses bank risk due to asymmetric information and reliance of internal bank models that may be inaccurate.
Schofield (2014) researches the difference between public and private company financial reporting. For instance, a private company has fewer consumers reviewing their financial statements, whereas public companies could have multiple consumers reviewing financial statements. In addition, private companies typically have less specialized accounting personnel, whereas public companies will have several. Lastly, Schofield (2014), reviewed the number of amendments proposed and finalized to help benefit private companies financial reporting.
Accounting Theory: Conceptual Issues in a Political and Economic Environment (6th edition ed.). South Western College Pub.
Insured customers exercise less care because they have less incentive to do so (Froeb, McCann, Shor & Ward, 2018). In the case of dental insurance, those who are uninsured have a greater motivation to take better care of their teeth as dental work can be particularly expensive, especially without insurance. Therefore, the financial ramifications of not being insured and needing an intensive dental treatment can prompt a person to take better care of their teeth. On the other hand, those who are insured have less of an incentive to take precautionary steps in order to ensure that they do not necessitate additional dental care. Additionally, it is worth to mention that certain other factors play into incentivizing both insured and uninsured patients; non-monetary
The principle territory we are planning to address is accounting fraud and how it could impact an organization by answering, the who, what, when and how. Its goal is to increase the awareness of accounting fraud and fraud counteraction. The intriguing thing about accounting fraud is that little disclosure as a rule usually leads to an enormous increase in fraud. A number of categories and sub-categories can be divided up for fraud.
The globalization of business has resulted in the need for compatible accounting standards that can be used internationally for financial reporting. As a result, the International Financial Reporting Standards (IFRS) were developed by the International Accounting Standards Board (IASB) to unify the various financial reporting methods and create a single accounting standard which can be applied to any financial statement worldwide (Byatt). The global standardization of financial reporting will increase the readability and enhance comparability of globally traded companies’ financial statements, without the need of conversion or translation. There are a few main differences between the International Financial Reporting Standards (IFRS) and the U.S. Generally Accepted Accounting Principles (U.S GAAP). The increasing recognition and acceptance of the International Financial Reporting Standards by accounting professionals in the United States, will affect the way in which the U.S will record financial statements in the future.
4) . One of the largest bankruptcies in history was enabled by accountants hiding debt and destroying the evidence to avoid implication (Buckstein, part 2 pgs. 1, 2, and 3). These unfortunate events led to the need for increased scrutiny and regulations, including the Sarbanes-Oxley Act (Buckstein, part 3 pg 1). This legislation inspired the creation of the Canadian Public Accountability Board (CPAB) (Buckstein, part 3 pg 1). These changes have led to an increased awareness of the need for auditor independence as well as higher standards for accounting and business in general (Buckstein, part 3 pg 1). While these measures have helped to reassure the public, there is still the question of why Accountancy is not a protected
I have applied the IFRS to audit half-year income statement and statement of finical position from domestic sub-company or oversea branches. This allows me to understand the difficultly of dealing with accounting report form different nations. For example, we have to negotiate each report from the U.S. with their reporter by phone. It would take incredibly long time to explain the difference in order to adjust the figures in the reports. During the stuff training, we have been taught that to be professional at everywhere and anytime. Moreover, I realise that the most important feature to be a professional accountancy is responsibility. This is because that a unit of misallocation will cost other team number a huge amount of work to correct it. The experience of taking notes of weekly conferences between senior managers and PWC partner has indicates that how does change in financial policy influence the accounting treatment. For instant, since vice-perminster Mr Le Ke Qiang who visited China Construction Bank at earlier May. He point out that the Rate of Non-Performing Loans could not exceed 7% in the “BIG Four” Chinese bank. This has led Chinese bank to relax its accounting standard of credit rating. It allows me to understand the relationship between government and financial
Auditing has been the backbone of the complicated business world and has always changed with the times. As the business world grew strong, auditors’ roles grew more important. The auditors’ job became more difficult as the accounting principles changed. It also became easier with the use of internal controls, which introduced the need for testing, not a complete audit. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. Computers played an important role of changing the way audits were performed and also brought along some difficulties.
The revenue/cost period-: Revenue and the cost period in accounting that the company get income from normal business activities. It’s referred to normal business income that the company got by selling their product and service.