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Role of managerial accounting
Role of managerial accounting
Fraudulent financial reporting may be accomplished through the manipulation of
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1. Financial reporting quality is related to the overall quality of the financial statements including disclosures which depict the fair presentation of the firm. Whereas in low financial reporting quality accounting figures are distorted or changed in such a way that their economic underlying reality is not correctly exhibited. For instance if the depreciable life of an asset is estimated in such a way which contradicts with its real economic life then it can be said that financial reporting quality is affected. In many cases there are alternatives available in the accounting standards or estimation and judgment is involved of the management. However, management can exploit these alternatives or judgments to change figures according to their desired outcome. For instance if management want to show lower earnings they can choose alternatives between inventory valuation methods (LIFO in case of rising prices) or lower depreciable lives. Management is usually in a position to manipulate figures because they are the ones who are responsible for preparing financial statements. American ...
In Dean Q. Wynn’s 3½ IRS Audit Red Flags, he attempts to teach the layperson to learn how to hire competent personnel to ensure proper and accurate filing of tax returns in order to avoid being audited by the IRS. This is because he believes that for most people, the reason behind being subjected to IRS audits is the improper filing of tax returns, which is in turn due to having hired incompetent personnel. Wynn does this by listing the various traps one has to avoid and supplements this by providing real-life case studies of various tax scenarios for better understanding.
Under the pressure brought by Mr. Wiles’ arbitrary management style, senior managers were just busy with making numbers, but not feasible plans. Such unreasonable management style resulted in the emergence of irresponsible behaviors. Besides, The Company emphasizes “make the number” instead of “make the accountable number”, which probably resulted fraudulent activities. The History department of MiniScribe’s accounting and public reporting function was directed not to question the number received from the Control, also called as the controllers for the company’s operating and manufacturing division. It’s so ironic that directors discouraged responsible employees’ responsible behaviors.
Interpretation of Financial Statements There are three main aids to the analysis of financial statements: HORIZONTAL and TREND ANALYSIS VERTICAL ANALYSIS RATIO ANALYSIS HORIZONTAL and TREND ANALYSIS = == == == ==
The New Zealand (NZ) Framework for Financial Reporting is in the process of changing since 2009, as a result of the review of the statutory reporting requirements in New Zealand by Ministry of Economic Development (MED) and the Accounting Standard Review Board (ASRB). The mainly recommendation was to remove small and medium sized companies from the statutory reporting framework (Ernst & Young, 2013, p.11). This New Zealand Framework for Financial Reporting 2010 (NZ Framework) was issued by the New Zealand Accounting Standards Board of the External Reporting Board (XRB) in 2011. The changes of framework pull open the NZ financial reporting standards that comprise NZ Generally Accepted Accounting Practice (GAAP) setting movement from ‘rule-based’ approach to ‘principle-based’ approach. Then comes to the question: Whether the application of NZ GAAP is supported positively by the NZ Framework with the appropriate underlying principles, or it preserved a largely ‘rule-driven’ approach? From my perspective, NZ Framework provides parts of applicable underlying principles in guidance of NZ GAAP but there are rooms for improvement.
Financial and Managerial accounting are used for making sound financial decisions about an organization. They provide information of past quantitative financial activities and are useful in making future economic decisions. (Albrecht, Stice, Stice, & Skousen, 2002) The same financial data is used to derive reports for each accounting process yet they differ in some ways. Financial accounting primarily provides external reports for external users such as stock holders, creditors, regulating authority and others. (Garrison, Noreen, & Brewer, 2010) On the other hand Managerial accounting is concern with providing information that deals with the internal viability of the organization and is tailored to meet the needs of an individual organization. (Albrecht, Stice, Stice, & Skousen, 2002)
Private and public accounting has long been discussed and disputed in regards to financial reporting. Since the Financial Accounting Standards Board (FASB) was created in 1973, accountants have called for different accounting regulations for private and public accounting sectors, as private companies do not have the resources to meet the complex requirements of public companies. Private companies currently are not required by law to issue annual or quarterly financial statements (James, 2012). Private companies do, however, have the option to apply the U.S. Generally Accepted Accounting Principles (GAAP), cash basis, or accrual accounting to their financial statements (James, 2012).
On September 28, 1998, Chairman of the U.S. Securities and Exchange Commission Arthur Levitt sounded the call to arms in the financial community. Levitt asked for, "immediate and coordinated action… to assure credibility and transparency" of financial reporting. Levitt’s speech emphasized the importance of clear financial reporting to those gathered at New York University. Reporting which has bowed to the pressures and tricks of earnings management. Levitt specifically addresses five of the most popular tricks used by firms to smooth earnings. Secondly, Levitt outlines an eight part action plan to recover the integrity of financial reporting in the U.S. market place. What are the basic objectives of financial reporting? Generally accepted accounting principles provide information that identifies, measures, and communicates financial information about economic entities to reasonably knowledgeable users. Information that is a source of decision making for a wide array of users, most importantly, by investors and creditors. Investors and creditors who are responsible for effective allocation of capital in our economy. If financial reporting becomes obscure and indecipherable, society loses the benefits of effective capital allocation. Nothing illustrates the importance of transparent information better than the pre-1930’s era of anything goes accounting. An era that left a chasm of misinformation in the market. A chasm that was a contributing factor to the market collapse of 1929 and the years of economic depression. An entire society suffered the repercussions of misinformation. Families, and retirees depend on the credibility of financial reporting for their futures and livelihoods. Levitt describes financial reporting as, a bond between the company and the investor which if damaged can have disastrous, long-lasting consequences. Once again, the bond is being tested. Tested by a financial community fixated on consensus earnings estimates. The pressure to achieve consensus estimates has never been so intense. The market demands consistency and punishes those who come up short. Eric Benhamou, former CEO of 3COM Corporation, learned this hard lesson over a few short weeks in 1996. Benhamou and shareholders lost $7 billion in market value when 3COM failed to achieve expectations. The pressures are a tangled web of expectations, and conflicts of interest which Levitt describes as "almost self-perpetuating." With pressures mounting, the answer from U.S. managers has been earnings management with a mix of managed expectations. March of 1997 Fortune magazine reported that for an unprecedented sixteen consecutive quarters, more S&P 500 companies have beat the consensus earnings estimate than missed them.
The field of financial reporting tends to bore many people, until it makes the front page in a typically catastrophic fashion due to one scandal or another. While we are happy ignoring the important accounting function of reporting and auditing while that function works properly, as soon as it fails, we turn on corporations and the accountants that keep them running to call for justice and perhaps reform. Today, the accounting practices of publically-traded companies are governed by numerous regulations and requirements, among them the Sarbanes-Oxley Act of 2002 (SOX), a piece of legislation introduced following a number of headline accounting scandals at companies like Enron and WorldCom (HBS Working Knowledge, 2014). It is vital that users
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
Discuss the Need for Regulation in Financial Reporting There is a need for regulation in financial reporting because of a number of reasons. There are several major user groups of financial reporting, some of which include equity investor groups, employee groups, analyst adviser group, the government, the public and other stakeholders. These different stakeholders however, need to be able to interpret and use financial information in a systematic way in order to make the necessary financial decisions. If these different user groups created financial reports, it will be prepared in diverse ways which would suit their various requirements. If this is the case, then different groups will interpret different financial reports in different ways.
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.
In today’s day and age, there is a lot of news that is related to corporate accounting fraud as companies intentionally manipulate their financial statements to show a better picture of their financial health. The objective of financial reporting is to provide financial information about a company to its various stakeholders such as investors and creditors so that these stakeholders can make decisions accordingly. Companies can show a better image of their financial well being by providing misleading information. This can be done by omitting material information from the books or deceitful appropriation of assets such as inventory theft, payroll fraud, check forgery or embezzlement. Fraudulent financial reporting will have an effect on the
On the other hand, there are also many limitations of the balance sheet is presenting an objective view of an entity’s wealth. Based on accountant’s choices of measurement methods i.e. depreciation, doubtful debt, balance sheet can be seen as subjective. For example, the choices of depreciation methods may affect the carrying amount of non-current assets and the business’s estimation of equity, i.e. wealth, as a whole. Additionally, the balance sheet leaves out many assets and liabilities that cannot be expressed in monetary terms i.e. intangible assets, contingent liabilities. Also, in the estimation of fair value, the use of Level 3 of the fair value hierarchy may raise the subjectivity of the balance sheet. Level 3 uses information that is unobservable from the market and models that are decided by the managers/ accountants. Hence, with the use of some measurement methods above, the balance sheet give some subjective opinions of the business’s wealth.
On the other hand, fair value accounting raises the concerns of reliability. The estimation of fair value tends to be subjective since because “many assets and liabilities do not have an active markets, therefore the valuations are less reliable” (Bies, 2005). It is reliable only if markets for assets and liabilities are liquid and transparent. Even though fair value accounting has its own importance in term of measurement, the perspective of historical cost should be taken into account. As fair value reflects the current market conditions, an asset for example should have been valued at $50,000 may suddenly fall to $30,000 due to the economic downturn. It results a loss of $20,000 in net income since historical perspective was ignored. Also,
Researchers have been attempting to develop the definition of earnings management yet there has been an inconsistency in the definition literature. According to Schipper (1989), earnings management is defined as “a purposeful intervention in the external financial reporting process with the intent of obtaining some private gain”. Another definition, which is more extensive is presented by Healy and Wahlen, states that “earning management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the• underlying economic performance of the company, or to influence the contractual outcomes that depend on reported accounting numbers' (Healy and Wahlen, 1998). In a basic interpretation, earnings management is a strategy employed by the management of a company to scrutinizingly manipulate the company’s earnings so that the end results match a pre-determined target. It is also “reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results', said McKee, he also emphasizes the need to understand the concept in the constructive way instead of being confused with financial accounting fraudulence.