Government accounting has several distinctive features and a specific purpose, which is reflected in legislation and the theoretical principles governing it. While private companies are accountable to public institutions, the government is also accountable to the people for the amount and purpose of the budget funds spent. According to Schiavo-Campo (2017), in order to comply with such accountability, it is essential to maintain the collection and analysis of relevant financial information and to report regularly on certain transactions.
Various financial and legal systems of specific states differ in their accounting standards and basis. This paper analyzes the nature of government accounting and its common features with private company accounting and discusses accounting standards, accounting basis, and budget principles and procedure for budget development in the UAE.
Nature and Characteristics of Government Accounting
The nature of the government environment is to perform public functions and serve the society within the framework set by the legislation. The state does not have a profit-making function, although it should spend the resources reasonably. As a rule, the state budget is primarily formed by taxes and trade transactions with state property or natural resources, which by default, are the public property. Thus, the government, when using these funds and resources, is obliged to be accountable to the people in this regard.
The government accounting system focuses mainly on recording, classifying, compiling, and publishing financial information on transactions conducted by authorities and public institutions. According to Schiavo-Campo (2017), accurate and timely financial information, verification and assessment of results are crucial for transparency, accountability, and the rule of law (p. 248). In order to satisfy this requirement, there is a strict hierarchy of accountability among the governmental entities. Unlike private sector companies, they have fixed functions and approved budget that should be spent exclusively on their implementation.
Nevertheless, there are several similarities between state entities and commercial organizations. Generally, legislation regulating market rules do not differentiate public and private entities. They function on an equal basis, according to the fundamental principles of competition, supply, and demand. Accordingly, the accounting systems for government and private sectors have certain similar features.
Due to the identical nature of the market activity, public and private entities are accountable for the same transactions and events. Schiavo-Campo (2017) states that recording of all expenditures and revenues according to the same methodology and regular production of financial statements are required for the government accounting system (p. 249). It bears mentioning that this also applies to private sector companies.
In addition, there are identical names for accounting provisions and units and also a unified classification of accountable operations in government and private accounting systems. Researchers note that accounting systems are divided into cash and accrual types, depending on the regulations that specify which financial events and transactions should be recognized for accounting (Schiavo-Campo, 2017). This division is inherent in both private and government accounting systems as both accounting bases can be used for either companies or public entities.
Accounting Standards and Accounting Basis in UAE
The UAE is an economically rapidly developing country that is becoming increasingly attractive to foreign investors. The researchers note that the UAE has not established national codified accounting standards (Aghimien, 2016). However, over time, the central bank has obliged certain financial institutions to report under the International Financial Reporting Standards (IFRS) in order to meet the foreign investors requirements of reliable accounting information (Aghimien, 2016, p. 81).
According to the UAE Ministry of Finance (MoF) official website, the UAE Cabinet adopted a Resolution No (2/2) of 2017, which included the Manual of Federal Government Accrual Accounting Standards (FGAAS) (UAE MoF, 2019). This document states that it is mainly based on International Public Sector Accounting Standards (IPSAS), which also complies with IFRS regulations (FGAAS, 2017, p. 5). Consequently, national government accounting standards in the UAE are in line with the principles of IPSAS.
The IPSAS is initially aimed at transparency and accuracy of financial data on transactions and events carried out by state authorities and public institutions. It also ensures the uniformity of such standards in different states, which is significant given the globalizing economic processes. The IPSAS contributes to the increased quality and transparency of public institutions accounting reports and more objective assessments. The FGAAS expressly enshrines these principles, arguing that its primary purpose is to ensure the preparation of high-quality financial statements and presentation of transaction and events in the most transparent and accountable manner (FGAAS, 2017, p. 21). Thus, the UAE is increasingly complying with international government accounting standards.
As the name of the above manual indicates, the UAE applies an accrual accounting basis. According to Schiavo-Campo (2017), it recognizes financial transactions and events to be relevant for reporting when a commitment has been made, rather than when cash has been paid or received under the commitment. The FGAAS states that the UAE government has only started a program to change the accounting basis from cash to accrual (FGAAS, 2017). This basis is more complicated because it deals with all commitments but is actively used in developed countries as it allows a better overview of economic dynamics.
Government Budget in UAE
The approach to the type of budget in UAE government accounting is constantly evolving. According to the UAE MoF official website available at www.mof.gov.ae/en/, in 2001, program and performance-based budgeting was adopted, and input allocations were linked to output objectives (UAE MoF, 2019). It also states that at the beginning of the second decade of the 21st century, the UAE began to adopt a three-year budget based on the zero-based framework. Thus, the UAE keeps pace with the latest trends in budget reporting.
The budgets primary goal are to make government entities publicly accountable and to improve the transparency of budget spending by comparing the remaining funds with the adopted budget. The FGAAS, equally with this objective, points out that the importance of the budget is to demonstrate the public authorities compliance with the approved budget and financial indicators in achieving the budget goals (FGAAS, 2017).
With regard to the contents, the UAE MoF stated on the referred website that 37.62% of the overall 2020 federal budget was directed to social development and social benefits spheres. Besides, 14.00% was allocated to infrastructure and economic resources and 32.61% to government affairs . The federal budget approval proceeds in several successive steps, including issuing a preliminary MoF circular, planning revenues and expenditures by public entities, drafting a budget law, its discussion, approval by higher authorities, and adoption. It should be concluded that the characteristics of the UAE budget demonstrate the high economic and infrastructural advancement of its government accounting standards.
Conclusion
The nature of public functions and the government environment has a strong influence on the specificity of government accounting, although it has a number of similarities with private sector accounting. The UAE government accounting is in a transitional period towards the goal of complying with current international accounting standards. The principles of formation and characteristics of the procedure for adopting the UAE federal budget indicate that the state is highly developed in the economic sphere.
References
Aghimien, P. A. (2016). Development of accounting standards in selected Middle Eastern countries in comparison to the United States of America. Review of International Business and Strategy, 26(1), 69-87.
Schiavo-Campo, S. (2017). Government budgeting and expenditure management: Principles and international practice. New York, NY: Routledge.
UAE Cabinet. (2017). Manual of Federal Government Accrual Accounting Standards. Web.
It is a well-known fact that each person can speak and participate in any kind of discourse community due to the existed ability to create various discourse texts.
As far as I am personally concerned, I belong to the accounting discourse community. Accounting is my major at school, and I spend a great deal of my time to penetrate deeply into the subject matter of this particular field of study. And, without any doubt, I have to live in the accounting community discourse as some of my friends and people around me are also involved in accounting on different levels. Moreover, our modern life is based on a variety of economic principles, people are absorbed into counting either money or taxes. What is more, people observe and discuss the prices in supermarkets, and make numerous attempts to become an integral part of the chosen discourse community.
Another kind of community I belong to is the youth discourse community. My belonging to this community may be explained by the simple fact that I am a young person with my ambitions, interests, and skills. I think that none will argue that the youth has its specific vocabulary, genres, and problems that may affect the text that produces the discourse. More than that I am a member of the society and this makes me belong to the various discourse communities, no matter who participates in this discourse and what languages they use (social security discourse, street communication discourse, school discourse, etc).
It is necessary to admit that all discourse texts can be of different genres. However, for instance, in the case of the accounting discourse community to which I belong, three different genres of the discourse texts may be defined: the genre of producers, the genre of the customers, and the genre of brand awareness.
The first one concerns itself with texts and vocabulary that the producers mainly use (commercials ads, accounts, business reports, etc.); the second genre deals with customers viewpoint to the service provided and to the actions of the producers and their teams; and finally, the third genre may be characterized as the one combining both sides and dealing with the famous trademarks (the so-called brands ), the customers awareness of them, and the producers desire to create a new brand or to drive the sales of an already existing one.
The discourse texts that are produced during that tag-like game are sometimes very difficult to be created by an uninitiated person, as well as to be used or read. Nevertheless, the unity of a good effort, persistence, necessity, or need and the fact of being surrounded by (or even existing in) this particular discourse makes me learn the idea of discourses deeper and understand how and why I need to be able to write, read, and use the texts of the accounting discourse community. From my own experience, I would like to stress that it is rather complicated and sometimes even boring for a non-native speaker of English to study the accounting discourse community texts.
The vocabulary and grammar seem to be the first problem because the use of some specific terms and word-combinations with the specific grammar constructions complicates the understanding of each of them. Another problem I faced with is the difficulty to retrieve correct information from this permanent flood of accounting problems, especially in the course of my studies. First, I could not simply understand what was needed so that I could start searching for the details.
I had to start studying this very problem of discourse genres and their lexis on the Internet forums. When people say that it was the Kilkenny cats fight, they mean saying nothing at all. It has been the persistent surfing on websites to get and expand basic information slowly to put every piece of information to its place. Finally, everything settled down in my head.
It is a well-known fact that each person can speak and participate in any kind of discourse community due to the existed ability to create various discourse texts.
As far as I am personally concerned, I belong to the accounting discourse community. Accounting is my major at school, and I spend a great deal of my time to penetrate deeply into the subject matter of this particular field of study. And, without any doubt, I have to live in the accounting community discourse as some of my friends and people around me are also involved in accounting on different levels. Moreover, our modern life is based on a variety of economic principles, people are absorbed into counting either money or taxes. What is more, people observe and discuss the prices in supermarkets, and make numerous attempts to become an integral part of the chosen discourse community.
Another kind of community I belong to is the youth discourse community. My belonging to this community may be explained by the simple fact that I am a young person with my ambitions, interests, and skills. I think that none will argue that the youth has its specific vocabulary, genres, and problems that may affect the text that produces the discourse. More than that I am a member of the society and this makes me belong to the various discourse communities, no matter who participates in this discourse and what languages they use (social security discourse, street communication discourse, school discourse, etc).
It is necessary to admit that all discourse texts can be of different genres. However, for instance, in the case of the accounting discourse community to which I belong, three different genres of the discourse texts may be defined: the genre of producers, the genre of the customers, and the genre of brand awareness.
The first one concerns itself with texts and vocabulary that the producers mainly use (commercials ads, accounts, business reports, etc.); the second genre deals with customers viewpoint to the service provided and to the actions of the producers and their teams; and finally, the third genre may be characterized as the one combining both sides and dealing with the famous trademarks (the so-called brands ), the customers awareness of them, and the producers desire to create a new brand or to drive the sales of an already existing one.
The discourse texts that are produced during that tag-like game are sometimes very difficult to be created by an uninitiated person, as well as to be used or read. Nevertheless, the unity of a good effort, persistence, necessity, or need and the fact of being surrounded by (or even existing in) this particular discourse makes me learn the idea of discourses deeper and understand how and why I need to be able to write, read, and use the texts of the accounting discourse community. From my own experience, I would like to stress that it is rather complicated and sometimes even boring for a non-native speaker of English to study the accounting discourse community texts.
The vocabulary and grammar seem to be the first problem because the use of some specific terms and word-combinations with the specific grammar constructions complicates the understanding of each of them. Another problem I faced with is the difficulty to retrieve correct information from this permanent flood of accounting problems, especially in the course of my studies. First, I could not simply understand what was needed so that I could start searching for the details.
I had to start studying this very problem of discourse genres and their lexis on the Internet forums. When people say that it was the Kilkenny cats fight, they mean saying nothing at all. It has been the persistent surfing on websites to get and expand basic information slowly to put every piece of information to its place. Finally, everything settled down in my head.
The public company accounting board was created as part of reforms in an act in 2002. The mandate of the board which was composed of members was to have oversight in the securities industry. This was averse to others like the securities commission which had limited powers (Justia, 6). The board had a right to start an investigation on a matter in the industry emanating from any firm that violated or was perceived to have violated the guidelines to the industry regulator. They did not have control from even the president meaning their power was executive. Free enterprise funds went to the court to seek the powers of the board curtailed on the basis they lacked control (Kilman, 20).
Issues
Free enterprise fund, the petitioner went to the court to seek removal of executive authority from the public company accounting board. The argument was that any executive authority is bestowed on the president of the United States and lack of control from his office of the powers to the board is in deep contravention from the constitution. The appointment of the board members was also questioned as having violated the appointments clause (Justia, 2010). This clause requires presidential appointment and Senate approval: this due process was not followed. Therefore the investigation that had earlier been carried out on the petitioner firm in which crucial information on its auditing procedures was released, was to be declared unconstitutional on that basis (Smith, 19).
Rules
The act that was passed to have the board has executive authority over financial institutions. This is in contravention with the constitution which states executive powers will be vested in the president of the united states of America . Therefore vesting the same powers to inferior officers without direct presidential control has separation of powers put into question (Irons, 70).
Analysis
The act blatantly said that the board members can only be removed on a good cause. This expressly restrains the president from removing the members from office on whichever ground, apart from a good cause. This cause is not definable hence lines are hard to be drawn on that case. The commission that has been mandated the removal powers are not under direct presidential control. The petitioner, therefore, has a case considering that it is touching on executive powers vested to the president in the constitution. Congress, therefore, erred in its lawmaking by not putting into consideration separation of powers. This diffusion should not have happened (Justia, 3).
Conclusion
The petitioner free enterprise fund has a genuine case against the plaintiff public company accounting oversight board. The powers bestowed upon the board are contravening presidential executive authority and congress erred in making them. Although the petitioner may have been on the wrong side of the law, the arguments laid pts to question the party that found and duly investigated the complaint. Therefore the petitioners auditing procedures should not have been public information at all (Justia, 2). The bench that looked into the case, therefore, found the board was illegally set up and was not under the direct mandate of the president of the United States to conduct their business and be held accountable for their actions if they went against the law. The petitioner was justified to have the case brought to the bench since the boards decision was appearing final (Daniel, 192).
Works Cited
Daniel, Lorttherm. et al: The Forgotten Founders on Religion and Public Life. Notre Dame: University of Notre Dame Press, 2009.
Irons, Peter. A Peoples History of the Supreme Court. New York: Penguin Books, 1999.
Mason Gaffney is one of the philosophers in the economic world who has created the philosophy of public finance. One of the principles of this philosophy is that a person does not pay taxes from the land, this is the land gives money for payment. Therefore, Gaffney draws a line between an owner and a land.
Then, Gaffney refers to the ways when taxes should be either reduced or eliminated, these are the cases when money are gained for public purposes, when the owner uses the land to serve others and when he/she has to hire labor. The finances presupposed for taxes should be spend on other issues.
Gaffney is also sure that people who possess land should pay more in comparison with those who do not possess it as it is obvious that those who have land have more income and can pat taxes in comparison with those who do not have land as additional indirect income. The ability-to-pay idea seems rather attractive to many philosophers of public finances. This point of view is interesting as it preserves incentives.
The core idea of this philosophic idea is a logical extension of the productivity theory of distribution where people are to be rewarded according to their contribution to the joint products of the economy (Gaffney, 1998, p. 177). Considering the building on the new houses, the landowners in this case should be reduced from the taxation as new buildings promote the development of the city and land, in this case, is considered as public value. Additionally, the flourishing of a city increases the land taxation and the income for public needs.
Governmental Accounting and Nongovernmental Accounting
According to Governmental GAAP Guide 2009, governmental accounting deals with public corporations and the bodies which work with politics. Additionally, the entities may be considered as the government if they meet the following requirements, the elections to one or more states takes place, the potential for unilateral dissolution by a government with net assets reverting to a government (in Crawford & Loyd, 2008, p.1-24) and an entity possess the power to enact a tax levy.
Nongovernment accounting deals with the entities which do not possess any of these characteristics. Therefore, it may be said that the main difference between governmental accounting and nongovernmental accounting is the details of payment. If the financial operations are directed at elections and other supportive aspects, the accounting is governmental. If payment is directed at other particular purposes, the accounting is governmental.
The Relationship between Budgeting and Financial Reporting in Government
Reposting has become one of the most essential aspects of budgeting and governmental accounting. The information resented in reports is aimed at helping control budget expenses and follow the violation if it takes place. In most cases the information is delivered every 45 days after the end of a fiscal year, however, there are situations when reports are to be completed within a month or for special demand. The reports are created by the audits which work in and auditory companies.
Audits work in accordance with the particular rules and they bare responsibility for the reports they complete. Audits may give the company several days to eliminate the violations where they took place and present the report without those violations however with the mentioning that they were. Audit report is an important document which shows the current state of affairs in finances of the company.
Works Cited
Crawford, M. A. & Loyd, D. S. (2008). Governmental GAAP Guide 2009. New York: CCH.
Gaffney, M. (1998). The Philosophy of Public Finance. In F. Harrison (Ed.), The Losses of Nations: Deadweight Politics versus Public Rent Dividends (175-206). London: Othila Press.
This discipline investigation is a process of examining the trends, responsibilities, and possible career paths in the accounting field. By conducting the discipline investigation, my expectations are clarified. I am encouraged to add courses that will increase my employability.
I chose to pursue a Bachelors degree in accounting because of the social recognition that financial managers have in public. Financial managers have the likelihood to become general managers or CEOs in a company if they have an accumulation of work experience from different firms.
Most career paths allow employees to attain managerial positions depending on their contribution and experience. My perception was that accountants start at a rank that is very close to the top most position. It could be two or three steps to the top depending on the size of the company or department. It increases possibilities of being the general manager or CEO, and a higher salary package.
Those who study commerce or marketing have to go through many stages. I thought for accountants to succeed, the skills needed are numerical accuracy, and paying attention to detail. An accountant does not have a sales target like some business-related careers. The first job may also start with an attractive paycheck. My expectations before the discipline investigation were that financial analysts have less work but receive a higher pay than most careers. I believe I am observant enough to recognize small changes in trends.
The US has conformed to IFRS (International Financial Reporting Standards) standards from GAAP (U.S generally accepted accounting principles). International accounting standards were found necessary as part of adapting to the global market structure (Paul & Burks 3).
Globalization has resulted in organizations setting business in several countries. Organizations operating in several countries need standardized financial statements and reports. The chances of getting a job in any country increase because accounting policies have been standardized globally. There is a global market requiring the services of accountants. I believe I will always be employed.
My subject is known as Christine Tamura. Currently, she is an electronic banking analyst at the Bank of Hawaii in Honolulu. She has over 20 years experience in the financial sector. Tamura chose to study accounting because she had recognized her mathematical skills in high school.
She points out that written communication skills provide an advantage. I have gained the inspiration that written communication skills are very important in the financial field. Ability to handle accurately large quantities of numerical data is necessary for a satisfactory work performance. Critical thinking and problem solving skills may be necessary for an exceptional performance.
Background and career path
Tamuras first job was to work as a staff accountant in the Prudentials Western Home Office Department of Treasury from March 1994 to April 1997. The first job position was an opportunity which matched her qualifications. She obtained a B.S., Business Administration (Accounting major) from the California State University. She has computers skills in programs such as Excel, Access, and Lotus among others.
The first job provided her with 3 years of work experience in the accounting field. Sweeney, Bame-Aldred & Thornburg elaborate that an accountant who exchanges firms before attaining two years of experience may be viewed with suspicion (9). Tamura had the 3 years work experience with the first organization. She was exposed to the Billing Department, and reconciling accounts which gave her an advantage to fill the quality auditor position with an insurance company.
In the first job, she knew she could adapt quickly to fit in areas that needed additional training. She said, There is no training, you just dive in. Adaptability was a very important skill as much as it is today. The first job provided a financial analysis career path which she had followed consistently to the current job position. Sweeney, Bame-Aldred & Thornburg discuss that employment with a big firm is an indicator of quality (9).
She has more than 20 years experience with a big proportion of the time spent in financial analysis. Her education qualifications and her experience in financial analysis make her fit her current position. I learn that I will need to find general accounting staff positions before seeking specialist positions.
Tamura made me recognize that the most important requirement to enter the field is an accounting degree. An accounting degree is the minimum requirement to be considered to fill a position in the financial field with a medium-sized or large firm.
Other qualities and skills such as analytical skills and communication skills are essential for better performance after meeting the minimum requirement for education level. In a job interview, having some analysis experience promotes a candidates employability. According to Tamura, the banking industry is much concerned about analysis skills. Tamura explains that she had to lift a 25 lbs weight in an interview. It shows that physical fitness is also valued in the workplace.
Knowledge on using computer software, such as Excel, Word, Outlook, and Access, is necessary for job consideration. A ten key by touch indicates high speed typing skills. Koumbiadis, Conway & Angel explain that accountants face the challenge of standards overload, and the need to keep pace with the explosion in technological advances (2).
Analysts use assistive software which requires them to update their training on a regular basis. The standards overload was a retaliatory action from the accounting standards board and organizations to avoid unethical behavior committed by accountants in the past. I recognize the need for continuous training in upcoming technological devices, and software.
Financial analysis is generated at the end of a particular period such as quarterly or annually. The complexity increases with changing accounting policies that approve one approach after another. Jesswein (3) discusses that financial analysis involves complex and large volumes of data. The management team uses the financial analysis reports to find reasons for good or bad performance. They give direction on how to enhance good performance or correct the bad performance.
Problem-solving capabilities may increase a financial analysts work ratings among the management team. There is a need to capture the audiences confidence through financial reporting. The job expectation in the field is that I need to have good communication skills to give good presentations. I need to do a thorough analysis, and make proper preparations to gain confidence in front of the top management team who will be my superiors.
One of the surprises in the financial analysis field that Tamura met is the lack of additional training by the company. The company expects a financial analyst to use his/her accounting knowledge to adapt to any new job descriptions that may occur. Tamura encouraged me to take many courses that are related to accounting to minimize the effect of surprises. Another surprise is found in salary distribution.
There is no significant difference in the salary amount earned between those with undergraduate degrees and postgraduate degrees (Sweeney, Bame-Aldred & Thornburg 10). The remuneration ranges from $40,000 to $80,000. It means one can have a high salary but low salaries are also possible. I expect a wide range of salaries.
Roles and responsibilities
Tamuras currently works as an electronic banking analyst. Her job description includes analyzing ATM performance, providing interpretation of results, and giving strategic direction. She provides insight on the automated billing system to increase efficiency.
She researches and resolves financial discrepancies that occur with other financial institutions, and processing networks. She prepares and processes checks and internal GL tickets to clear/offset settlement, billings, and write-off on various electronic-banking products. Bales & Fox state that to combat fraud, prevent it by understanding the early signs of fraud (2).
They elaborate that it is necessary to detect fraud early to be able to deal with it properly. This calls for a continuous monitoring and analysis process. An e-banking analyst has to pay a high attention to detail to detect discrepancies. It also requires use of assistive software to detect irregularities.
Tamura holds the second highest job position in the financial section of her branch. The Bank of Hawaii is organized in six sections. These are retail, sales, operations and technology, administration and legal, accountancy, and risk management. The accountancy section has only one department known as control & accounting (Bank of Hawaii, chart).
Accountants may fall under four groups. These are management accountants, government accountants/auditors, public accountants, and internal auditors (A look at accounting careers, par. 5-8). Tamura position falls under management accountants. She provides the management team with an analysis for decision-making process.
For a financial analyst, the minimum requirements are the 4-year-course accounting degree, and 2 years of experience in a banking sector. Tamura has more than 13 years in the banking sector. She has spent most of these years playing roles that relate to financial analysis.
The basic computer training application packages required is Excel, Access, and Word. Microsoft Outlook may also be needed for the Local Area Network (LAN) system. Cory & Huttenhoff (5) explain that the most preferred degree for private firms was the 120-hour bachelors degree in accounting rather than the 150-hour bachelors degree. An accounting degree is more preferred than a degree in finance, business administration or information systems.
CPA is considered the most relevant certification for accountants though it may require 150 hours in some states. It is obtained after a degree in accounting in some states. Employers think that increasing the number of learning hours after the 120-hour training does not have an impact on an accountants quality.
Newly signed accountants may generate positive ethical perceptions from their audience. Newly staffed accountants have a good rating because studies indicate that there is no relationship between ethical perceptions of newly staffed accountants and unethical behavior of corporate leaders (Koumbiadis, Conway & Angel, 10).
It gives confidence to newly staffed accountants during presentations. Cory & Huttenhoff (6) claim that ethics is the second most important topic to cover in college after intermediate accounting. Without ethics, the entire profession is at risk. Integrity is essential. Otherwise, accounting reports would lose their credibility. From this part, I learnt that an accountants ethical behavior is the second most important quality after accounting knowledge.
The respondent faces the biggest challenge when they are going through a system conversion. They are required to develop new reports within a short period. Changing the system means changing the vendor system or procedures in electronic banking. It involves analyzing and transferring reports from the old system into the new system.
Despite the challenges of shifting into a new system, they are meant to provide better solutions. Burks, Lewis, Paul & Daniel (4) discuss that monitoring software may solve the problem of documentation required by the legal system. By updating electronic banking tools, the procedures are able to enhance security, and avoid losing the documentation.
The amount of work during system upgrade is large but it is aimed at increasing work performance. It also reduces the effort needed to meet exceptional work performance. Her team has to ensure that the new system functions as planned. When an automated system is faulty then it keeps on generating faulty results.
It requires multiple test runs. An effective system is good for workers. Customers satisfaction level also improves with a new operating system. In the ATM and e-banking section, the banking sector faces high competition. A bank may lose its competitive edge if it does not upgrade to match emerging trends. I learn that a system change may involve a lot of work but it is necessary for better services.
Financial analysts may face the challenge of delivering bad news. Bad news is a finding that portrays that business opportunities may decline or profitability may reduce. The problem of delivering unfavorable findings is likely to happen with non-professional investors. Li & McDowell (9) explain that investors may judge an analysts attribute, such as investment-banking relationships, rather than the findings of his/her report.
The investors who are already in business respond more commonly with the attribute effect than prospective investors. They may ignore important factors such as causes of the outcomes. It may require a good report that emphasizes the study of a trend, outcomes, and causes among other factors that create a situation rather than the conclusion of the report.
Reports are presented to the management team/board. The management team has an average sophistication level that is higher than the average consumer sophistication level. A higher sophistication level means higher demands for better explanations. They also require more facts and references to win their approval. Tamura works for a highly competitive market segment.
Tamura presents her findings to a group of professional investors. This may not always be the case, sometimes a financial analyst may work for non-professional investors. I need to be prepared to distinguish my audience, and highlight the most important parts of an analysis report.
Communication skills
Most financial analysis is based on periods which may reduce everydays work. Daily work may include making updates about changes in financial statements. Financial analysis is generated at the end of a particular period. The target for writing communication includes other financial institutions, and the management team. She needs to develop researches, and resolve discrepancies that may emerge between the bank and other financial institutions.
It may require documentation which can be printed or present as a soft copy. She may be required to prepare PowerPoint presentations to summarize matters to the top management team. They may be used as an aid to her presentations.
Cory & Huttenhoff claim that critical thinking is given the highest priority followed by written communication (6). One of her roles is to investigate, analyze and report on changing trends to management to minimize losses on ATM related issues. She is mainly involved in developing reports. The reports may be generated according to regular intervals set by the company. Her performance improves by providing possible strategic direction for her organization. It requires critical thinking and problem solving skills.
From her description and nature of her work, speaking and listening are the most important oral communication skills. They are used during presentations about reports, and findings. Her advice was to attend speech classes to be able to give good presentations after making analyses, and developing reports. Listening skills are important for one to be able to cope with criticism. Listening is also necessary to identify parts that require adjustment in a report.
Cory & Huttenhoff (6) discuss that oral communications was ranked fourth in the priority list. That is, after critical thinking, written communication, and interpersonal skills. Tamura describes that one should expect criticism from co-workers and the management. Interpersonal skills help an individual to respond positively to criticism. They assist employees to achieve good work performance within the teamwork.
Reading skills are also important in the financial analyst position. A financial analyst should be aware of market trends, and changes in consumer preference to get some ideas about solving business problems. It is necessary to go through recent market descriptions from specialists in journals, magazines, newspapers, and websites. From reading reports from other analysts, the financial analyst is able to understand investor behavior, and consumer preference (Li & McDowell 9).
For example, the analyst may understand the investors reaction to unfavorable reports, and analysts responses to nonprofessional investors subjective judgment. Investment requires continuous learning. A good part should involve learning from other peoples experiences. Investment mistakes can be very costly, and may act as a barrier in an analysts career path. There are benefits of pioneering in a trend before the idea diffuses to the entire market. Learning trends early may be beneficial when making decisions.
Conclusion
The discipline investigation has provided more insight on the roles and responsibilities of a financial analyst. Tamura had fewer responsibilities in her first job compared with her current job. As one gets higher in the rank, roles and responsibilities increase. I have learnt that critical thinking and written communication are given the highest priority in the recruitment process.
Tamura has been successful because of numerical skills, skills in computer systems, and work experience. I have also learnt that computer knowledge in Excel and Word are essential for a beginner in the workplace. With the remaining time in college, I will try my best to add related courses that may enhance my level of adaptability.
Organizations expect accountants to change to new systems, sometimes without providing training for the change. Tamuras career path has been progressive. She started in the general accounting staff before becoming a financial analyst. Her experience at the Treasury made her work easier at the insurance company. Afterwards, she has always done some financial analysis for firms that she joined. From these, I learn that financial analysis may start among other roles before one becomes known fully as a financial analyst.
The Ligand Company violated U.S. accounting standards and concepts, specifically U.S. GAAP when it understated its sales returns to present a better financial picture of the company. The research focuses on the Ligand violations of U.S. consistency, comaparability, and fair presentation standards and concepts (Bragg, 2007). The research focuses on the criticism on PCAOB for being too stringent. The financial statements must display the fair presentation of the organizations business activities.
International accounting standard 18 focuses on revenues. Revenue is income that is precipitates from the daily business activities of the company. Revenue is recorded when it is probable that future economic benefits will flow into the coffers of the company and the benefits can be measured (Bragg, 2007). Likewise, revenue represents the gross inflow of benefits from the daily business activities of the company. In this regard, sales return is a necessary accounting entry that reduces revenues to its net realizable.
Gross sales less sales returns produces net sales; net sales is the revenue that represents the gross inflow of benefits from the companys daily business operations. Likewise, international accounting standards 1, preparation of financial statements, discusses the intricacies of recording business transactions, including when, how, and how much should be recorded in terms of sales returns (www.IASB.com).
Ligand failed to comply with the accounting standard and concept specially IAS 18 and IAS1. Ligand underestimated its sales return figures to show a fraudulent net revenue figure of only 2.5%. Ligand should present the real sales return figure which is higher.
The higher sales return figure would reduce net revenues; this true net revenue estate presents a less favorable picture of Ligand when compared to the fraudulent net revenue shown in the Ligand financial statements. Fazio should use realistic figures such as the forecast done by Fazios auditing staff shown to be from 13% to 20%. Consequently, Fazio should not issue a non qualified opinion (Moeller, 2008).
In response to the understatement of the sales returns, the external auditors should recommend an adjustment to the sales return figures from the erroneous 2.5% to the realistic figure; the realistic figure is from13% to 20%. Failure to comply with the audit recommendations would force the external auditors to avoid issuing a nonqualified opinion (Delaney &Whittington, 2010).
From its creation, the PCAOB had many criticisms from many affected sectors, especially the external auditing firm. There have been many complaints directed at the Public Company Accounting Oversight Board. One of the major criticisms is that the PCAOBs issuance of AS2. This is a 150 page auditing standards that forces external auditors to metamorphose into a more conservative type of audit program when handling each audit client.
Another major complaint is that AS2 does not explain in detail how publicly listed companies establish a fair internal control system (Moeller 2008). Likewise, the PCAOB has forced external auditing firms to increase its audit expenses; the auditing firm must increase its audit time and audit program to ensure a better audit work as compared to the less stringent auditing program prevailing prior to the PCAOB and Sarbanes Oxley Act.
The PCAOB introduced the stricter audit policies to prevent a repeat of the Enron, WorldCom, and other accounting scandals where the external auditors connived with their clients to present fraudulent financial statements. Many audit companies complained that PCAOB prescribed auditing standards were too cumbersome and expensive (Daelen 2010).
The PCAOB should implement some measures to improve the efficiency as well as effectiveness as a Sarbanes Oxley Act created auditing oversight body. The PCAOB should hold regular meetings with representatives from all affected sectors of society, especially the external auditors.
The PCAOB body should taper its stringent auditing policies to ensure the survival of the auditing firms. In addition, the PCAOB should openly receive suggestions from auditing firms and the client firms as basis for issuing future audit related policies and procedures.
Briefly, the Ligand Company violated U.S. accounting standards and concepts, specifically U.S. GAAP by understating sales returns. The external auditor required adjustments to correct the fraudulent Ligand Company financial report. The PCAOB has been criticized for being too stringent on the auditing firms. Indeed, financial statements should present the fair presentation of the organizations business activities.
References
Bragg, S. (2007) Wiley GAAP Policies and Procedures. New York, J Wiley & Sons Press.
Daelen, M. (2010) Risk Management and Corporate Governance. New York, Edward Press.
Delaney, P., Whittington, R., (2010) Wiley CPA Exam Review 2011: Auditing and Attestation. New York,J. Wiley & Sons Press.
Moeller, R. (2008) Sarbanes -Oxley Internal Controls. New York, J Wiley & Sons Press.
Accounting is a practice and body of knowledge concerned with business recording methodologies, keeping of financial records, auditing, analysis of financial information, and advising on tax matters (Clayton 45).
It applies as a systematic process that entails discovery, recording, measuring, arrangement, confirmation, elucidation, and statement of financial information. Accounting also entails preparation of financial statements used in decision-making by shareholders in a business, the government, employers and other stakeholders (Wells 9).
Statement of financial information applies through reports that indicate the financial resources controlled by an organizations management. Accountants monitor financial records for accuracy, and timely delivery of information in a proper manner. The cardinal focus of accounting is revealing the performance of a business or an organization over a given period (Clayton 52).
Accounting also informs on the available resources, how the resources were financed, and the outcomes achieved by the resources. For an individual to work as an accountant, he/she must have specific academic qualifications, personal attributes, and be in a position to handle all duties and responsibilities in an honest manner.
Businesses and individual clients all over the world entrust accountants with the responsibility and trust of managing their finances (Clayton 61). However, some accountants are breeding a vicious culture in the profession by encouraging fraud, financial mismanagement, deception, and other pecuniary crimes.
Integrity among accountants is essential in maintaining the respect and important role of financial management in economic development that the discipline plays (Wells 13). Due to the increasing pressure that accountants work with, the challenge of integrity is slowly maturing into a global quandary (Gerety & Lehn 34).Dishonesty among accountants has serious implications on the destiny of companies and individual clients who entrust them with a responsibility to prepare financial reports for them.
Essential skills for accountants include mathematical reasoning, oral and written comprehension, deductive reasoning, inductive reasoning, problem sensitivity, information ordering, and finger dexterity among others.
Financial statements prepared by accountants include balance sheets, cash flow statements, statements of retained earnings, income statements, as well as management discussion and analysis (Gerety & Lehn 41). In addition to the educational qualifications of an individual, there are certain key competencies essential for a successful career in this realm.
These competences are attention to detail, planning and organization, strong communication skills, a team player, ability to work under highly stressful environment and emotional intelligence (Walters 100). This essay will identify and discuss forms of dishonest behavior among accountants, the effects of the unethical practices, and the best approaches for preventing dishonest behavior among accountants.
Dishonest Behavior in Accounting
Accountants are prone to engaging in dishonest activities in the course of their duties. Since the profession entails a process of discovering, appraising, and stating of economic information to allow knowledgeable verdict and determination by those who apply the information, it is important to be aware of the vices associated with it (Gerety & Lehn 39).
There are numerous vices associated with the discipline, but there are two universally acknowledged as accounting vices that apply in all workplaces. The first unethical accounting practice is inducement (Pasco 123). Inducement is a vice that stems from an organizations top management, who pressure accountants when funds to secure the continuity of operations lack or are not accounted for. However, most people are ignorant of the fact that inducement mostly results from greed and thirst for power.
When an accountant accepts a bribe from a top manager in his/her organization to cover up a financial blunder, it shows high greed (Gerety & Lehn 43). On the other hand, a leader in an organization who plans to bribe their juniors for a cover up, manifests a lot of thirst to remain in power, and influence decisions within the organization. This is the power and influence that members of top management in an organization use to bribe accountants into directing finances to wrong commitments.
Inducement by accountants applies through overstatement of an organizations values or understating liabilities within an organization for personal gain (Wells 19). Some of the personal gains can include in job promotion, pay hikes, reduced responsibilities, or award of scholarships for organizations that promote employee education.
An accountant behaves dishonestly if they follow through an inducement attempt (Gerety & Lehn 51). A good example is the once largest American energy company, Enron. Whenever this company is mentioned people often remember the scandal on huge debts that drove it into bankruptcy. What led the company into bankruptcy was nothing else but the unethical practices of accountants at the firm.
Accountants under the influence of key individuals within the company made complex financial structures and transactions that facilitated deception (Wells 23). Major investors in the company were deceived off more than $1 billion due to false accounts. When the dishonest act of the accountants came into light, a serious financial crisis broke out within the company, and recovery attempts were unsuccessful.
The second accounting vice that happens in most workplaces is fraud (Wells 33). Fraud in accounting refers to deliberate falsification of pecuniary records with a purpose to make proceeds through puffed up stash values and dodging liability commitments.
This vice entails unethical activities of financial mismanagement within an organization that apply dodging such that they do not appear in financial statements and reports (Walters 112). Fraud aims at achieving illegal benefits through false accounts that apply in appropriating public funds. False accounts have the ability to earn one huge benefits, thus the motivation by accountants to hang their morality and integrity when engaging in the activity.
However, fraud management has continued to be a challenge despite numerous laws in countries like the United States of America. A good example is the Sarbanes-Oxley Act of 2002 that enhanced restoration of public trust in American markets (Walters 117). The act requires top management in all public and private companies to confirm the correctness of all financial information stated, as well as developing a culture of whistle blowing.
The act further increased the severity of fraud related activities by accountants, as well as the autonomy of individuals who review financial statements and reports. The Sarbanes-Oxley Act developed because of numerous accounting scandals reported by various corporations in America. The scandals created an urgent need to streamline the activities of accountants and auditors, as they have a responsibility towards their employers, as well as their professional code of ethics.
Effects of Dishonest Behaviors in Accounting
Information provided by accountants applies in crucial organizational processes such as decision-making, recruitment, diversification, as well as purchasing and supplies (McNair par. 6). Therefore, the accuracy of the information provided is very important as it determines the success of these processes.
In turn, these processes determine the destiny of an organization, thus the need to achieve their success. Success in this context entails acquisition and retention of the best talent in the market, financial viability, effective resource management, as well as ability for prolonged market competition. Numerous effects result from unethical behaviors by accountants and include bankruptcy (McNair par. 8).
The cases of Enron and WorldCom provide good examples of how dishonest activities of accountants can lead an organization into bankruptcy. Bankruptcy connects closely to another effect of unethical conduct by accountants, which is lack of investor confidence. In the case of Enron, investors in the company lost money in the tune of billions. The aftermath of these activities was investors who shied away from investing in the American market as they had lost faith in the guarantee of security for their investments.
The third effect is high levels of unemployment (McNair par. 8). When all the companies that fell prey to fraud activities by their accountants filed for bankruptcy, thousands of people loss their source of income as the companies had to close down. Since the companies could no longer finance any operations, the workers who carried out these activities lost their jobs.
Unethical accounting activities also lead to slow economic growth (Pasco 129). When investors lose their interest in a market, and unemployment rates increase then the gross domestic product in an economy will fall drastically.
Without investments, an economy cannot run smoothly, as it will struggle to meet the demands of everyone, support its crucial process, as well as offering a good environment for business (Pasco 133). In the end, this results in inflation as prices will go high amid little or no income for most people. Another effect is that professional development and growth of the discipline will reduce.
Through frauds and bribery activities, people will eventually lose trust and interest in the profession due to a dented image (McNair par. 11). Professional bodies affiliated to the profession will have a huge challenge of defending their integrity on the back of unethical activities that leave numerous questions about their integrity. As one of the oldest and most important professionals, there is an urgent need to provide a lasting solution on how prevention and management of dishonest behaviors among accountants ought to apply (Pasco 139).
How to Prevent Dishonest Behavior in Accounting
Several approaches can apply in managing the challenge of dishonest behavior in accounting. The biggest contributor to dishonest behavior among accountants is ignorance of their ethical duties of responsibility towards their actions and decisions.
They have a responsibility towards their employers, colleagues, and their professional body. Management of unethical behavior in this discipline entails understanding why accountants engage in these activities, identifying any existing laws addressing the challenge, their implementation, as well as alternative measures to the key motivators for accountants engaging in the activities (Pasco 101).
First, use of modern technology would effectively monitor and discuss behavior among accountants. Use of social media as a monitoring and discussion platform fits perfectly for this objective. Through social media, people will be able to discuss how accountants behave in various parts, compare notes, and analyze their conduct critically.
Accountants can also use social media to express their concerns and probably give an insight into their key motivators when engaging in activities such as fraud (Pasco 112). However, social media can be challenging because the virtual nature of social media attracts individuals who disguise themselves as honest people, yet they have ill intentions of manipulating peoples thinking towards a direction that will favor them.
Although the craze of integrating modern technology into workplaces is popular, it is important to remember that availability of access to internet can affect productivity. The second approach is involving supervisory bodies and organizations such as the Federal Bureau of Investigation (FBI) and American Institute of Certified Public Accountants (AICPA) (Singleton 89). The role of FBI is to carry out investigations into fraud scandals within the profession.
They engage all the necessary authorities to establish why, how, where, and with whom questions about the scandals. After conducting and finalizing investigation reports, the FBI should deliver them to AICPA the professional body that will punish the culprits (McNair par. 12). For AICPA to fulfill this mandate, the government ought to provide the necessary support through legislations that address the profession, as well as giving AICPA the authority and independence to handle the situation (Singleton 90).
A good example of government legislation enforced to handle fraud scandals and other forms of financial mismanagement is the Sarbanes-Oxley Act of 2002 (McNair par. 14). The act requires top management in all public and private companies to confirm the correctness of all financial information stated, as well as developing a culture of whistle blowing.
The act further increased the severity of fraud related activities by accountants, as well as the autonomy of individuals who review financial statements and reports (Singleton 103). Another approach is cooperation between organizations employees and the relevant supervisory bodies. This approach is cost effective, uses primary data that has little alterations, and helps to provide an organizations accounting history that is necessary in investigations.
Conclusion
Accounting also entails preparation of financial statements used in decision-making by shareholders in a business, the government, employers and other stakeholders. Statement of financial information applies through reports that indicate the financial resources controlled by an organizations management.
For an individual to work as an accountant, he/she must have specific academic qualifications, personal attributes, and be in a position to handle all duties and responsibilities in an honest manner (Singleton 105). Due to the increasing pressure that accountants work with, the challenge of integrity is slowly maturing into a global quandary. Dishonesty among accountants has serious implications on the destiny of companies and individual clients whom they prepare financial reports.
Due to the seriousness of the challenge about accounting integrity, strategic approaches ought to be developed and implementation should be oriented towards cleaning the dented image of the profession. Economic development would be meaningless without accounting services, as businesses and organizations would not be in position to establish their financial performance and progress (McNair par. 13).
The main aim of managing and regulating accounting activities is to prevent the likely occurrence of fraud scandals in organizations like that at Enron. Fraud aims at achieving illegal benefits through false accounts that apply in appropriating public funds. False accounts have the ability to earn one huge benefits, thus the motivation by accountants to hang their morality and integrity when engaging in the activity.
Works Cited
Clayton, Richard. AICPA Professional Standards. London: Cambridge University Press, 2008. Print.
Gerety, Mason., & Lehn, Kenneth. The Causes And Consequences Of Accounting Fraud. New York: John Wiley & Sons, 1999. Print.
To effectively manage an organization, leaders should manage accounting information effectively. Although Vincenzo Vasta has been successful in his restaurant business, much success and ease in management can be attained with effective accounts management practices.
Accounting information is crucial for decision making to both internal and external users of accounts. When up-to-date and accurate accounts records are maintained, managers are able to make informed decisions (Barry and Jermakowicz, 2010). This report discusses the gains that Vincenzo Vasta would get by maintaining an effective accounting system in his restaurant business.
With well-maintained accounting records, Vincenzo Vasta will be able to make informed decisions; informed decisions lead to competitiveness in an organization. Leaders are accountable to external users of accounts who include the government for taxation purposes, shareholders, bankers, and creditors; they are willing to know the financial strength of an organization so that when making decisions whether to transact with the company or not, they are informed of the strength or financial base of the company.
Accounting is guided by international accounting standards, this creates some set of uniformity that players in the industry should conform to; when some set of discipline and integrity are maintained, then an organization can compare its operations with others in the same industry, having the same operating risks, and size.
Comparison of companies assists in knowing whether a certain company is using its resources in the most effective manner or else it is able to mitigate and manage operating risks in the most effective method at its disposure.
For example when gauging the price to charge certain meals, accounting information is likely to offer insight information on the right approach to use when pricing the foods. With the information Vincenzo Vasta can know whether to charge extra for lunch specials or dinner, the information that he will get from the accounting department include sales trend analysis.
Marginal cost/price analysis will be another benefit that the company will get from the accountant; the directors will know whether it is beneficial to open an hour earlier in the evening (this will be attained through cost benefit analysis tools of managerial accounting).
Transactions in an organization can be managed effectively if appropriate accounting data and records are maintained; for instance to determine the price of a commodity, management should consider all the operating costs that have gone into the production of the said commodity. Other than the costs associated, there should be an analysis/consideration of the operating profit margin that the company would like to get from the said commodity.
The above information is accounting information that companies need to manage and hold effectively. A company is considered different and independent of its directors; the above legal requirement has been one of the challenges that non accountants have had when accounting for their companies.
The differences are recognized by the law to the point that transactions between the director and the company are considered as transactions with third parties. For taxation purposes, there has always been some controversy when drawings from the company by a director are considered as income to the director that should be considered for individual tax purposes.
Another area that has brought issues is how to treat services offered by directors in their own company; non accountants fail to understand that the services should be considered as a service offered by employees to the company thus payments should be received by the director. It happens that directors offer their services to the company without considering that they are supposed to earn some salary/income from the company and be in subjected to individual taxes like any other income (Anthony, Hawkins and Merchant, 1999).
Accounting information is crucial for planning and setting operating standards for the company; with an effective accountant, the company will have an operating base of minimum expected revenue and costs. The annual and monthly budgets are made in light with the potential that the company has, in the event there are some difference s at the end of the year/accounting period, the manager will be advised and solution sort for to avoid the same mistake in the future.
When an accountant has been involved in the business, professionalism will get into the system creating some room of integrity and effectiveness in doing business. For example with an account, Vincenzo Vasta will be able to differentiate what assets the company owns and which ones should be treated as personal and individual assets.
According to company law, a company is considered a legal entity/person with the capacity of accruing and keeping assets. When Vincenzo Vasta hires the service of an accounts, the business with be able to be operated with the differences required by the law of the state.
Laws relating to finance, accounting, and business regulations keeps changing, with the changes may be on technical basis or areas that a non-management may fail to understand the effect they will have on his business thus break the law without knowing. With a qualified accountant, such mistakes and misinformation will be unheard of to the benefit of the company.
When changes occur, accountants have the capability of interpolating them and seeing if there is an effect that they will create to the business.
Different situations calls for different decisions; to make the right decisions in light of the operating environment, accounting information is crucial; for example Vincenzo Vasta might not fully understand the effect that global financial crisis had on his business and the kind of decisions he should make to ensure that the company get in track fast. With an account such information will be offered.
Other than the benefits that Vincenzo Vasta will get from hiring the services of an accountant, the service comes at a cost to the company (Horngren, 2007).
When meeting with manager Vincenzo Vasta should have a clear picture and perspective of the nature system that he would like his business to take. With the right business picture he will be able to set the agenda of the meeting which should revolve around improving his business efficiency (Langfield-Smith, Thorne, and Hilton, 2009). The following are the main agendas that he should have when meeting the manager:
What can be done to improve the companys efficiency?
What are the key performance indicators that the company should be looking at?
How can the business diversify its business as it mitigates operating risks associated?
How can the company benefit from globalization?
The frequency of Vincenzo Vasta and his companys manager meetings should be determined by two main parameters that is how the business is doing (financially, socially, and politically) and changes in business/industry. However Vincenzo Vasta should ensure he has met with the manager at-least once a month to discuss the how the business is fairing.
References
Anthony, R., Hawkins, D. and Merchant, K.,1999. Accounting: text and cases. Boston: McGraw Hill.
Barry, J. and Jermakowicz, K. ,2010. Wiley IFRS 2010: Interpretation and Application of International Financial Reporting Standards. New York: John Wiley and Sons.
Horngren, H. ,2007. Accounting Edition 7e. New Jersey Prentice Hall.
Langfield-Smith, K., Thorne, H. and Hilton, R. ,2009. Management accounting: information for creating and managing value. Sydney: McGraw Hill.
The theory of positive accounting explains the managers choices of the specific accounting methods regarding self-interest. It also outlines the relationship among the different categories of stakeholders, and the manner in which financial accounting should be applied to minimize cost through aligning the competing interests.
Therefore, this paper is a research work that describes and discusses two contrasting arguments, (ex ante efficiency and ex post opportunistic) regarding policy selection and application, in the context of positive accounting theory.
Since the financial statements are perceived as composite whole, they comprise of Balance Sheet, Profit and Loss Accounts, Cash Flows, and other constituent elements (Bennett 2010, p. 7). This means the companies Act and other statutes have provisions to govern the entities during policy selection. This is very useful because proper selection of the policies makes the accounting records valid and the outcome reflects the entitys financial position (Bebbington, Gray & Laughlin 2001, p. 402).
In selecting the accounting policy, compliance and statutory provisions might differ, thereby compromising the fairness and truth. As a result, selection and determination of such policies are based on appropriateness to the entity.
Literature Review
The issue of ex ante efficiency or ex post opportunistic arguments are very critical to the study of positive accounting theory applicable in financial accounting. Literally, an entity is only stable to the extent that it is well-organized and perpetuates the efficiency (Sun & Rath 2008, p. 406). In addition, the efficiency would enable the entity to exploit the opportunities, which are available while selecting and applying the accounting policies.
Ex ante (Efficiency Arguments)
Ex ante refers to before the fact. Considering the assumptions of ex ante, capital markets would efficiently react to the information that is publicly available without any bias (Sun & Rath 2008, p.408).
Essentially, this happens prior to any action so that the entity prepares for up front before the process of selecting and successive application of the accounting policies take place (Bebbington, Gray & Laughlin 2001, p. 404). Therefore, selecting and applying the accounting policies depend on the efficiency with which the entity would respond to the market dynamics (Taylor, Taylor & Coulton 2005, p. 554).
In addition, the various data sources are of significant use in the process of selecting and applying the accounting theories, meaning that the management has to make truthful revelations, which neither contradict nor corroborate other available data (Glautier, Underdown & Morris 2010, p. 42).
In this regard, the assumptions related to the entitys efficiency in selecting and applying the best accounting policies underscores the managers integrity (Sun & Rath 2008, p.412). As a result, the market would be less concerned with the successive accounting disclosures, which the managers are considered to be accountable for.
Within the perspective of efficiency, one realizes that there are mechanisms in the entity, which minimize the cost of operation while at the same time, increase the output in qualitative and quantitative aspects (Taylor, Taylor & Coulton 2005, p. 559). In this argument, the position is vital because it paves way for formulating the best accounting policy options, which would benefit the entity.
Ex post (Opportunistic Arguments)
The ex post is the opportunistic perspectives of PAT. Indeed, it is called ex post because it happens after the fact. For example, the anticipated opportunities after the formulation of the accounting policies in respect to public behaviour should be addressed (Sun & Rath 2008, p.416).
This perspective portrays the negotiated and possible contractual arrangements regarding the particular firm. Additionally, it predicts and explains into details the anticipated opportunistic behaviours upon the application of the accounting policies (Bebbington, Gray & Laughlin 2001, p. 405).
In explaining this perspective, the entity relies on expectations, which may occur or fail to materialise (Sun & Rath 2008, p.417). For instance, the accounting policies especially the ones, which are expensive, might yield unintended outcome from the public.
The reason justifying the opportunistic argument is that sometimes, the specific contractual arrangement could have been arrived at because it was perceived to be effective, reliable and satisfactory to the interest of the majority in the entity (Taylor, Taylor & Coulton 2005, p. 566).
However, with time, the accounting policies, which were thought to be very efficient, might become impractical depending on the status quo. This might force the firm to alter the accounting policies to match the current guidelines, events and human behaviour (Glautier, Underdown & Morris 2010, p. 43).
The proponents of this argument also postulate that it might not be easy to write a comprehensive accounting policy that provides absolute guidelines applicable in all situations (Taylor, Taylor & Coulton 2005, p. 567).
This means the managers would have some levels of optimism, thus should be flexible in terms of selecting and applying the accounting policies. Besides, the policies should also be flexible for future alterations as situations, events and human behaviour changes (Sun & Rath 2008, p.417). Apparently, this would make the policies relevant, applicable and suits the status quo.
The perspective also considers the opportunistic actions, which the public could undertake if the different contextual strategies have conceptualised by the policy makers (Sun & Rath 2008, p.418). As mentioned earlier, it is costly and not easy to stipulate comprehensive accounting rules, which are applicable to all situations.
Therefore, PTA postulates that the entities will always have room to select the practicable accounting policies, which they prefer bearing in mind the anticipated opportunistic variables after the selection (Taylor, Taylor & Coulton 2005, p. 568). In this sense, the agents or entity would exercise as much caution as possible.
Analysis
Accounting Policy Selection
For Intangible Assets
In financial transaction, accounting policy selection is very important because it allows easy comparison of reporting for the entities (Bennett 2010, p. 15). It is important that the selection relies on an outline of other accounting policies.
Any change in the accounting policy would automatically alter the mode of selection and the specific policies to be applied (Bebbington, Gray & Laughlin 2001, p. 408). In addition, proper guidelines have to be applied, especially those from IASB while selecting the accounting policy so long as it is fit for the circumstance (Glautier, Underdown & Morris 2010, p. 42).
As well, the selection and application of accounting guidelines have to consider the error margins so that the policies do not become irrelevant. For instance, in selecting an accounting policy for an entity with depreciating assets, the best policy would depend on the hours that the particular asserts have been in use (Bebbington, Gray & Laughlin 2001, p. 412). The policy should also allow for gradual depreciation based on the value of the item through determining the degree of tear and wear.
For Financial Instruments
In cases of financial instruments, the entity has to be keen while selecting the policy to make its application easy and convenience. In this regard, the selection of policy should be guided by factors such as prudence, substance and materiality (Glautier, Underdown & Morris 2010, p. 48).
Prudence
This is the level of caution that the entity exercises when making judgements on the various conditions of certainty or uncertainty (Glautier, Underdown & Morris 2010, p. 48). The decision will depend on the item the entity has, thus may vary from one to another. Through exercising due prudence, the anticipated profit is not the basis of consideration, but all known losses should be compressively covered.
Substance
Every item has economic value and substance that must be considered while selecting the policy option (Glautier, Underdown & Morris 2010, p. 50). Notably, determining the worth of the item is crucial in formulating the accounting policy to its effect.
Materiality
Often, materiality affects information of an item. Information could be classified as material if the errors and omissions, which have significant affect on economic decision of the user, in relation to the financial statements (Glautier, Underdown & Morris 2010, p. 52).
In order to select the best accounting policies, financial statements have to unveil material items, which could influence the users decision. It is also essential to consider other factors such as relevance, completeness, reliability, and neutrality is important to the users because the attributes make the financial statements meaningful (Glautier, Underdown & Morris 2010, p. 52).
Policy Application
For Intangible Assets
In accounting practice, there are specific cases when the IFRS particularly applies to certain transaction, condition or event. In such cases, the accounting policy application on the item is directly correlated to IFRS principles (Bennett 2010, p. 27). When the policy implementer ignores the IFRS provisions, then the application of the policy becomes very complicated.
Another important aspect of accounting policy application is that the laws are resilient to IFRS guidelines because the policies realized after considering the conclusions of ISAB on the financial statements (Glautier, Underdown & Morris 2010, p. 54). Notably, the financial statements have reliable and relevant data regarding the particular transaction, condition and events to the effect of their application.
Therefore, the policies should be applied in cases where the effects of such application are deemed immaterial. Alternatively, if the consequences of applying such policies are material in nature, they should never be used (Glautier, Underdown & Morris 2010, p. 56).
However, it would be inappropriate to leave or make immaterial that are uncorrected, especially those originating from IFRS. Engaging in such an act to achieve specific presentation of the business financial position, cash flow or financial performance could be of very severe consequences to the entity (Bebbington, Gray & Laughlin 2001, p. 419).
In addition, the IFRS has guidance that help the entity apply its requirements (Bennett 2010, p. 29). Here, all the guidance gives an account of the IFRS integral parts, thus becomes useful in applying the accounting policies. Furthermore, the implementers have to use the guidance that depends on entire IFRS integral parts (Marshall 2010, p. 11). However, the guidance that does not depend on IFRS integral parts might not contain the necessities of financial statements.
In cases where IFRS that particularly applies to events, transaction, or condition is absent, the entity has to make judgement on the ways of developing and subsequently applying the accounting policy (Marshall 2010, p. 14. Therefore, it makes the application of accounting policies be relevant to prevailing economic conditions and cares for the interest of the users.
For Financial Instruments
In the cases of for financial instruments, once the accounting policy is reliably, its application becomes easy. The reliability is achieved when the financial statement portrays some of the characteristics below.
First, when the financial statements represent the entitys actual financial position, cash flow and financial performance, the application of the accounting policies becomes simplified in the organization (Taylor, Taylor & Coulton 2005, p. 556). This implies that the accounting policy makers would examine all the entitys financial statements to formulate workable guidelines whose application would not be challenging.
Secondly, if the financial statements reflect on the economic value of the items, which the entity offers, the policy makers would not rely on the legal form, but on the condition, worth, and events under which the transactions were made (Taylor, Taylor & Coulton 2005, p. 557).
This enables the implementers of the accounting policies work within certain limitations, which guarantees easy application. This signifies that the application of such accounting policies is not limited to the products itself, but also to the event, condition and its economic value (Bebbington, Gray & Laughlin 2001, p. 420).
Third, the financial statements are reliable to the extent that they are non-biased (Taylor, Taylor & Coulton 2005, p. 557). It is easier to implement the accounting policies, which are arrived at, through neutral means. Indeed, such policies reflect the truth about the transactions, making their application non-controversial.
Fourth, the financial statements are reliable to the extent that all the transactions are prudent (Taylor, Taylor & Coulton 2005, p. 558). Here, prudence means that the transactions were cautiously done. This reduces the limitations during the application of such accounting policies. Notably, applying the prudent accounting policies is less controversial compared to the ones, which are done while exercising caution of the variables including condition, event and uncertainty among others (Bebbington, Gray & Laughlin 2001, p. 427).
Fifth, the financial statements are reliable if they are comprehensive in terms of materiality (Taylor, Taylor & Coulton 2005, p. 559). Notably, materiality is central to the application of accounting policies in that the financial statements have to reveal the material items, which could influence the users decision, thereby help the implementers during policy application.
There is also retrospective application of accounting policies during adjustment on the transactions affecting the products. In this case, the entity changes the initial balance of the affected product prior to the formulation of the accounting policy (Weygandt 2008, p. 52).
Moreover, it assists during the application because the respective policy would look into the specific elements of each product that the entity provides. Once the policy has been altered comprehensively to correspond to the new products particulars, the policy implementers would find it relatively easy to apply the new guidelines for all the entitys products (Taylor, Taylor & Coulton 2005, p. 560).
Despite the advantages of retrospective application of accounting policies, there are underlying limitations to the same. In essence, the limitations affect the nature of application and the approach in which it should be articulated (Weygandt 2008, p. 53). This could greatly influence the application of accounting policy. Some of the limitations, which might be experienced on issues relating to retrospective application, include the following.
First, in cases where retrospective application is required due to the alterations in the accounting policies, the change would be applied in a retrospective manner, until it proves impractical to resolve either the cumulative or period-specific impacts of the alteration (Weygandt 2008, p. 54). Indeed, the limitation affects the retrospective application of accounting policies due to its specific and cumulative effects on the policy.
Secondly, when establishing the period-specific impacts of altering an accounting guideline becomes impracticable based on the available comparative data for a given period (Weygandt 2008, p. 55).
Here, the entity might be forced to use the latest accounting policies in doing evaluation on the liabilities and assets for the period that required retrospective application, and the timeframe in which it is practicable (Taylor, Taylor & Coulton 2005, p. 561). Notably, the period might be current and has corresponding impacts, which would adjust the initial products value for the specific period.
Third, establishing the cumulative impacts might be impracticable during the beginning of implementing the adjusted accounting policies that the case in previous periods (Weygandt 2008, p. 60). This implies that the entity must respond and adjust comparatively, to the information so that it could respond to the challenges of the new accounting guidelines (Taylor, Taylor & Coulton 2005, p. 562).
Therefore, in order to new policies practicable, they should be applied as soon as they are formulated. This indicates that when the entity applies the adjusted accounting guidelines, it has to apply the latest accounting strategies to the relevant comparative information within the period deemed appropriate (Weygandt 2008, p. 65).
Conclusion
In summary, the theory of positive accounting is very explicit regarding the managers preferences for the specific accounting policies in relation to self-interest. The research also clarified the relationship between the two contradicting arguments about the issue of ex ante efficiency or ex post opportunistic that are very critical to the study of positive accounting theory applicable in financial accounting.
It also examined the manner, in which financial accounting should be applied to minimize cost through aligning majorly the competing interests. In the context of positive accounting theory (PAT), the two contrasting arguments of policy selection and application featured prominently.
Analytically, within the perception of ex ante (efficiency), the study concluded that there are mechanisms in the entity, which significantly decrease the cost of operation. Similarly, increase the effectiveness that guarantees high output in qualitative and quantitative terms. Therefore, this argument is fundamental since it helps the accounting policy makers in formulating the practical accounting policy guidelines, which would be to the advantage the entity.
On ex post (opportunity), the research indicated that the specific contractual arrangement is possible because it was perceived to be effective, reliable and satisfactory in the interest of the majority in the entity. However, it became clear that the specific accounting policies, which one would perceive to be very efficient, might become unworkable in future depending on the prevailing condition.
Therefore, it concluded that this might force the entity to modify the accounting policies to match the latest guidelines, human behaviour and events.
References
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