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
Bebbington, J., Gray, R., & Laughlin, R., 2001, Financial Accounting: Practice and Principles, Thomson Learning, New York.
Bennett, G., 2010, Accounting Principles and Practice, BiblioBazaar, Charleston.
Glautier, M., Underdown, B., & Morris, D., 2010, Accounting: Theory and Practice, Prentice Hall, New York.
Marshall, P., 2010, A Complete Guide to the Principles and Practice of Business Accounting, How to Books Publishers, London.
Sun, L., & Rath, S., 2008, Fundamental Determinants, Opportunistic Behavior And Signaling Mechanism , Business Research Papers, vol. 4 no.4, pp.406-420.
Taylor, S., Taylor, S., & Coulton, J., 2005, Is benchmark beating by Australian Firms Evidence of Earnings Management? Accounting and Finance, vol. 45, pp.553-576.
Weygandt, J., 2008, Accounting Principles, John Wiley & Sons, New York.
Accounting cycle is a series of activities that that shows the entire process a transaction goes through from start to end. These processes are repeated in each accounting period. The paper discusses the accounting cycle of the office of the chief financial officer. The cycle follows some common steps.
The first step is identification of the transaction and the events which surround the transaction. The second step focuses on the putting together source documents of the transaction. The third step entails examining and putting the transactions into classes. This step entails ascertaining the monetary value of the transactions and identifying the accounts where the transaction will be posted.
At this stage, the persons involved also identify whether to pass a credit or debit entry on the accounts affected. The fourth step involves recording the transactions into journals. These journals depend on the nature of the transactions. The fifth step entails sorting out the entries in the general journal.
Once sorted, the entries are posted to various ledger accounts. It is important to point out that these first five steps occur repeatedly throughout the accounting cycle that is from start to the end of the accounting cycle. The subsequent steps occur at the end of the financial year. The sixth step entails preparation of the trial balance.
The trial balance shows a summary of ledger accounts maintained in an accounting period. It shows the debit and credit balances from the ledger accounts. The trial balance has no significant accounting meaning. It only helps in identifying errors while posting transactions because, in the presence of errors, the debit and credit balances will not be in agreement.
The seventh step entails correcting the errors in the trial balance. The corrections can only be executed if the credit and debit balance are not tallied. The errors can be caused by wrong posting of transactions or omission during posting of transactions (Hunt, Kieso, Weygandt & Warfield, 2010).
The eighth step entails coming up with adjusting entries to correct the errors in the trial balance. The ninth step entails passing the correcting entries in the ledger accounts. The tenth step entails coming up with a trial balance that reflect the adjustments made. This step is similar to the sixth step.
The accountant must ensure that the trial balance is in balance. This should be done severally until the trial balance is in balance. The eleventh step entails preparing the financial statements these are, statement of financial position, income statement, statement of retained earnings, and cash flow statement. The twelfth step entails coming up with closing journal entries to close up the temporary accounts.
The thirteenth step entails passing the closing entries to the ledger accounts. After passing the journal entries, the fourteenth step will entail trial balance to ensure that the debit and credit entries are in balance. The final step involves preparing reversal journal entries.
This stage is option though it helps an accountant to ensure that there is no double accounting of corrective entries done when preparing the books of accounts. More than often, the accounting cycle is often grouped into seven steps. It is best to breakdown down into several smaller steps so as to ensure that all steps are taken into account (Kieso, Weygandt, & Warfield, 2010).
The office of the chief financial officer formulates and manages annual budget and performance plan, coordinates strategic planning, develops an annual performance and accountability report implement government performance result (United States Environmental Protection Agency, 2013).
The officer also provides financial services and makes payments on behalf of the state and other agencies. The chief financial officer is Barbara J. Bennett, the deputy is Maryann Froehlich and associate chief financial officer is Joshua Baylson. The office of the chief financial officer comprises of seven sections. The sections represent the activities they carry out. The first section is the office of the budget.
The section is charged with the responsibility of formulating budgets. The office of the budget leadership is led by David bloom as the director. The deputy director is Carol Terris. This office offers the first step of the accounting cycle in the office of the chief financial officer (United States Environmental Protection Agency, 2013).
The second section is the office of planning, analysis and accountability. This section carries out strategic and annual planning, performance management and reporting efforts. The section aligns the strategies to the government budgets. The section is led by Kathy Sedlak OBrien as the director and Allison Wiedeman as the acting deputy director. The third section carries out the third step of the accounting cycle of office.
The office provides policy, reports, and oversight essential. The section is headed by Steve Silzer and Jeanne Conklin as the deputy director.
The fourth section is the office of technology solutions. The section carries out technology planning, standard setting and development and deployment of financial and resources management system for the agency (United States Environmental Protection Agency, 2013).
The section is led by Quentin Jones and Robert Hill as the deputy director. The other sections such as office of the financial services, office of the resources and information management, and center for environmental finance for support services.
References
Hunt, F., Kieso, E., Weygandt, J., & Warfield, D. (2010). Intermediate accounting problem-solving survival guide. Hoboken, NJ: Wiley.
Kieso, E., Weygandt, J., & Warfield, D. (2010). Intermediate accounting. Hoboken, NJ: Wiley.
United States Environmental Protection Agency. (2013). About the office of the chief financial officer (OCFO). Web.
The use of fair value or mark-to-market accounting is extremely widespread among various organizations, including those ones that represent the financial services industry. This method is also advocated by investors who need to estimate the price of various assets. This approach has often been criticized during the economic and financial recession which broke out in 2007. Much attention is often paid to the sub-prime mortgage crisis which triggered the downfall of several financial institutions such as Lehman Brothers.
This paper is aimed at describing the peculiarities of this method. Furthermore, it is critical to determine to what extent fair value accounting could contribute to the subprime crisis. Overall, one can argue that this method of accounting should not be regarded as the underlying cause of the sub-prime crisis. Instead, more attention should be paid the internal inefficiencies within financial institutions, especially lack of proper risk management strategies since these problems increased the vulnerability of various banks.
Certainly, one should keep in mind that fair value cannot always be used to predict the long-term changes in the price of an asset. Nevertheless, from the investors viewpoint, this indicator is the most objective one. This is the main thesis that should be discussed more closely. Overall, these details can have profound implications for different stakeholders.
The main peculiarity of fair value accounting
It should be noted that the term fair value can be defined as the estimation of a products worth provided that it is sold in the open market (Penman 169). It should be mentioned that there is no clear algorithm for determining this price. In many cases, this task has to be performed by an independent appraiser. One should also keep in mind that the fair value of an asset is regularly updated.
The concept of fair value should be distinguished from historical cost which is used to describe the price at which a certain asset was purchased by the owner. In many cases, the use of historical costs is very inaccurate because the value of an asset can change dramatically with time passing (Penman 167). As a rule, organizations rely on fair value accounting in order to determine the worth of their assets while reporting their financial performance. To a great extent, this approach has become a gold standard in various industries.
The use of fair value accounting is also advocated by investors. Moreover, it is recognized by governmental institutions such as the Financial Accounting Standards Board. These are some of the key issues that should be taken into account. At this point, it is important to examine the key events that lead to the sub-prime crisis which affected millions of people.
Sub-prime crisis
One should keep in mind that the value of mortgage-backed securities was based primarily on the price of real estate. Since the early 2000s, these prices were continuously rising and very few investors saw the signs of a housing bubble as well as the irrational behavior of many buyers (McDonald and Stokes 1104). For a long time, they assumed that the price of housing would remain relatively high (McDonald and Stokes 1104). Additionally, one should mention that the loans could often be given to people who could not repay them.
Many of them could be affected by such problems as unemployment. This is why such mortgages were called sub-prime. However, these risks were overlooked because people were firmly convinced that real estate could guarantee the security of mortgage-backed assets.
The attitudes of investors changed dramatically when the rates of foreclosures increased while the price of housing decreased dramatically (Adjei 80). These issues are important for understanding the topic; in particular, this information can a person evaluate the criticisms of fair value accounting and the way in which this method could be related to the sub-prime crisis.
The use of this method and sub-prime mortgage crisis
Criticisms offered the opponents of fair value accounting
Overall, the critics of fair value accounting put forward several arguments in order to demonstrate that this method intensified the effects of the sub-prime mortgage crisis. One of the main points is that the use of this method significantly diminished the capital base of various banking institutions. Apart from that, the representatives of these organizations note that they did not intend to sell mortgage-backed securities at extremely low prices.
Moreover, in their belief, market prices did not really throw light on the long-term value of assets (Badertscher, Burks, and Easton 62). To a great extent, this argument implies that many banks could be brought to the brink of bankruptcy due to market panic; however, their financial performance could be sound. It should be kept in mind that regulating institutions are required to declare that a bank is at the risk of financial collapse if the fair value of its assets diminishes dramatically.
In addition to that, the critics of fair-value accounting state that many investors do not rely on valid information which making purchasing or selling decisions (Valencia, Smith, and Ang 694). In this case, the term information can include facts about the financial performance of any organization, return on investment, competition, and so forth. In many cases, they pay more attention to noise or daily fluctuations in the price of an asset (Valencia Smith, and Ang 693).
Apart from that, the fair-value marketing can cause the fire-sale of assets. This argument is particularly relevant if one speaks about such financial institutions as Lehman Brothers and Northern Rock. The main cause of their downfall was cash flow insolvency which emerged due to the use of fair value accounting.
This is why the representatives of financial institutions call for a different method of evaluating the assets of financial organizations and enterprises. This is one of the aspects that should be distinguished since it is vital for understanding the potential limitations of this approach and delineating the scope of this method.
To a great extent, this discussion can be tied to the so-called efficient market hypothesis. It is the assumption according to which the prices accurately reflect the information about different securities or stocks. Nevertheless, the validity of this hypothesis is often questioned. It should be kept in mind that traders can misinterpret financial trends (Frydman and Goldberg 120).
These are some of the main criticisms identified by researchers. One should also bear in mind that when reacting to noise, people are more likely to display a downward bias (Frydman and Goldberg 120). In other words, they tend to make pessimistic predictions about the performance of financial assets, including mortgage-backed securities. Sometimes, these estimations can be driven by panic, rather than impartial evaluation (Frydman & Goldberg 120).
These results indicate that fair-value accounting could misguide the decisions of investors. It seems that these results should not be overlooked because they suggest that the fair value is not necessarily impartial. This detail should be recognized by policy-makers and investors.
Apart from that, this issue should not be overlooked by people who design risk-management policies of financial organizations; by considering the information about accounting methods, these people will pinpoint and eliminate the key weaknesses in the work of businesses. These are some of the points that can be made.
Apart from that, one should take into account that the fair value of assets can be very difficult to estimate. Moreover, there are different methods that can be applied in order to estimate the price at which certain security can be purchased. Overall, this issue indicates that the notion of fair value can be valid provided that there is an impartial way for appraising the worth of such securities. This argument is particularly relevant if one speaks about securities backed up by sub-prime mortgages.
The fair value prices of these assets were very high for the long term; however, they did not reflect the long-term worth of such assets. This is why researchers argue that it is necessary to use both fair value and historical cost accounting. In their opinion, mark-to-market accounting is not quite suitable when it is necessary to evaluate the worth of assets with a long-term holding period. The critics of fair-value accounting argue that this method reflects the beliefs of investors about the potential price of an asset (Andrews).
However, in itself, accounting is not aimed at proving forecasts (Andrews). These are the main limitations that should be taken into account. Yet, one should consider the arguments made by the supporters of this tool because, in this way, one can identify the strengths and weaknesses of this accounting method.
Defense of fair value accounting
Overall, it is important to mention that this criticism of fair value accounting cannot be fully accepted. One should bear in mind that fair value accounting could simply be regarded as a convenient excuse for the inefficient work of banking institutions, especially those ones which strongly relied on mortgage-backed securities. They did not fully consider the impact of possible risks. This is one of the issues that are not closely discussed by critics of fair value accounting.
Therefore, scholars want to test the criticisms of this method in an empirical way. Furthermore, researchers note that financial institutions perceive fair-value accounting as a scapegoat (Badertscher, Burks, and Easton 59). Instead, they should have paid more attention to internal inefficiencies and the failure to consider the risks of relying on mortgage-based securities. This is one of the aspects that should be recognized. Researchers tested the arguments put forward by the critics of fair value accounting.
In particular, they examined the functioning of 150 leading banks working in the United States. They did not find sufficient evidence which can prove that the losses of banks could be explained by the use of mark-to-market accounting. Moreover, the existing regulations did not necessarily force banking institutions to respond to capital-depleting charges (Badertscher, Burks, and Easton 59).
Moreover, they state that fair value accounting losses did not significantly affect the regulatory capital of many banks (Badertscher, Burks, and Easton 59). These are some of the main aspects that can be distinguished.
This case is important for showing that one should not blame this approach to accounting for the failures of various institutions because this perception can make a person overlook the underlying causes of the sub-prime crisis. For instance, one can mention such a problem as the inability to make financial institutions more responsive to external stressors such as the fluctuations in the prices of certain goods.
Furthermore, one should keep in mind that fair value accounting affected a certain type of assets, in particular, mortgage-based securities. However, it did not influence other stocks or bonds. Therefore, one can assume that the risk management policies of these banks could be flawed. This argument can be particularly relevant if one speaks about such financial institutions as Lehman Brothers.
Apart from that, it is important to mention that the representatives of financial institutions did not object to the use of fair value accounting at the time when the price of mortgage-based securities was relatively high. They did not state that the use of this tool could lead to significant problems. They did not pay much attention to the risks of fair value accounting and their long-term impacts. This is why the criticisms offered by banking institutions can be questioned.
Additionally, this question should be examined from the perspective of investors. These individuals and organizations prefer to rely on fair value accounting in order to estimate the worth of any financial asset. In their opinion, it is the most transparent way of appraising the worth of assets. Certainly, the fluctuations of the prices can provoke irrational behavior, but at present, this indicator is the most valid measurement. Furthermore, these people cannot rely on the estimations offered by a company because these estimations can lack transparency. The opinions of investors are often overlooked by the critics of fair value accounting. Therefore, this method cannot be dismissed by financial organizations as well as investors who need to make judgments about the value of stocks or securities.
Discussion
To a great extent, these examples show that fair value accounting should not be blamed for the onset of the sub-prime mortgage crisis. Admittedly, investors could overreact to the fluctuations in the price of securities. In some cases, such behavior can be irrational, and it can increase the volatility of financial institutions.
Therefore, some of them could fail due to panic in the market, rather than lack of capital. Nevertheless, many of the banks could be vulnerable because they relied strongly on mortgage-based securities. This is why they could not respond to the risk of external stressors such as the changing prices of real estate. However, their failures cannot be attributed to fair value accounting. Furthermore, one can say that this approach can still be regarded as a gold standard. This is the main arguments that can be advanced.
Conclusion
Despite the potential limitations of fair value accounting, it remains the most optimal method for evaluating the worth of securities. One should mention that the sub-prime mortgage crisis can be explained by several factors. In this case, much attention should be paid to the lack of appropriate risk management strategies which are critical for increasing the sustainability of financial institutions.
Certainly, in many cases, investors can take irrational decisions, even when they make judgments on the basis of fair-value prices. This risk should not be overlooked, but the problems do not undermine the validity of mark-to-market accounting because this method is most transparent and informative. These are the main details that can be singled out.
Works Cited
Adjei, Frederick. The sub-prime mortgage crisis and the changing value of cash. Journal of Economic and Finance 33.4 (2011): 79-92. Print.
Badertscher, Brad, Jeffrey Burks, and Peter Easton. A Convenient Scapegoat: Fair Value Accounting by Commercial Banks during the Financial Crisis. The Accounting Review 81.1 (2012): 59-90. Print.
Frydman, Roman, and Michael D. Goldberg. Beyond Mechanical Markets : Asset Price Swings, Risk, And The Role Of The State, Princeton: Princeton University Press, 2011. eBook Academic Collection (EBSCOhost). Web.
McDonald, John and Houston Stokes. The housing price bubble, the monetary policy and the foreclosure crisis in the US. Applied Economics Letters 20.11 (2013): 1104-1108. Print.
Penman, Stephen. Accounting For Value, New York: Columbia University Press, 2011. eBook Academic Collection (EBSCOhost). Web.
Valencia, Adrian. Thomas Smith, and James Ang. The Effect of Noisy Fair Value Measures on Bank Capital Adequacy Ratios. Accounting Horizons 27.4 (2013): 693-710. Print.
The accounting scandals that have rocked the United States in recent years continue to raise profound questions on the viability of the rules and structures put in place to enforce compliance with international accounting standards.
Although the 2001 Enron debacle is possibly the biggest high-profile scandal to be reported in history, other corporations such as Tyco, Quest, Adelphia and WorldCom have had their share of corporate and accounting scandals, involving the rigging of accounting records to inflate profits, insider trading to enhance stock sales, fake bankruptcy claims, and excessive executive compensation (Champlin & Knoedler, 2003).
This paper assesses some enforcement strategies that continue to be employed to deal with accounting scandals. In 2002, Quest Communications, Inc. was accused of involvement in accounting scandals associated with hollow swaps and insider trading irregularities, and was fined $250 million by the U.S. Securities and Exchange Commission (SEC) (Giroux, 2008).
To deal with this and other accounting scandals, the SEC and other regulating agencies have developed various enforcement strategies aimed at ensuring companies adhere to healthy accounting practices. These strategies are illuminated as follows.
It is a well known fact that funding for the SEC has been substantially increased in recent years to provide the oversight body with excellent capabilities to undertake constant reviews in corporations suspected of unethical accounting practices.
The funding has coincided with expanding regulatory powers for the SEC as well as expanded auditor responsibilities to ensure agencies are able to focus on significant cases that will have a momentous impact (Giroux, 2008). The SEC new whistleblower program, mandated by the Dodd-Frank Act, has been instrumental in ensuring enforcement of rules and structures aimed at ensuring that accounting scandals will no longer be a threat to the countrys economic stability.
In particular, this program now ensures that corporate insiders have &a financial incentive to report fraud and accounting manipulation outside of their company instead [of] waiting for it to be resolved quietly inside (Eaton & Akers, 2007 p. 69). Today, individuals who act as whistleblowers are protected from employer-related adverse retaliation and persecution, not mentioning that the SEC has installed a fully functional Office of the Whistleblower to deal with the payment of monetary awards to qualifying whistleblowers (U.S. Securities & Exchange Commission, 2012).
The SEC, in collaboration with other agencies, has &developed formal agreements, similar to those used by criminal law enforcement authorities, to secure the cooperation of persons who are on the inside or otherwise aware of organizations engaged in fraudulent activity (U.S. Securities & Exchange Commission, 2012 para. 4).
Not only do these cooperation contracts posses the capability to guarantee the accessibility of witnesses and information preceding the commencement of investigations, hence facilitating the agency to assemble stronger cases more quickly and efficiently, but they also act to guarantee a possible attenuation in penalties for insiders who provide objective evidence and consent to cooperate and testify.
Moving on, the SEC is continuously engaged in improving risk assessment capabilities, with the view to enhance its risk assessment procedures and approaches to better identify critical areas of risk and promote the viability and objectivity of information provided by companies to their shareholders and other regulatory bodies (U.S. Securities & Exchange Commission, 2012).
In most instances, these capabilities are used in concurrence with risk-based examinations of companies to select firms for possible assessment based on specific risk characteristics (Giroux, 2008). Other enforcement strategies include strengthening internal control mechanisms, undertaking constant corporate governance changes, and recruiting staff with specialized skills and experience (U.S. Securities & Exchange Commission, 2012).
References
Champlin, D.P., & Knoedler, J.T. (2003). Corporations, workers and the public interest. Journal of Economic Issues, 37(2), 305-312.
Eaton, T.V., & Akers, M.D. (2007). Whistle blowing and good governance. CPA Journal, 77(6), 66-71.
Giroux, G. (2008). What went wrong? Accounting fraud and lessons from recent scandals. Social Research, 75(4), 1205-1238.
Small and large firms automate their accounting systems to improve their operation efficiency. The efficacy of using automated systems cannot be undermined by the costs associated with their acquisition and maintenance as the cost savings are high (Gelinas & Sutton, 2002). The tax and advisory services offered by the firm in the metropolitan area are manageable by the use of mere spreadsheets. The use of an automated system in such activities, however, could increase the speed at which the staff can handle these tasks. The planned expansion of the firms accounting practice to offer services to homeowners will increase the work to be done and the number of transactions to be handled on a monthly basis. Unlike taxation and advisory services, home associated bills need more monitoring to ensure that all homeowners are furnished with the right information concerning their bills at the right time.
The monthly bills and payment collections to be remitted to the firm are too many to be handled manually by the few employees. The automation of the accounting system will save the cost associated with employing more workers as the system will manage the clients and the staff. The ability of the system to generate periodic financial reports makes it a better tool as it requires no human effort and provide information necessary for planning.
Proposed System Requirements
Billing Processing
The billing process requires three key things namely the input data, the output data and controls to ensure that the input-output processes are working as desired.
Input Requirements
The billing system will be responsible for generating itemized bills belonging to a single homeowner. A large number of homeowners necessitates the adoption of a system that caters for all data captured and entered into the system. The various services offered will aid in the creation of itemized lists, which will contain services such as office supplies, rental space, utility expenses, snow and refuse removal, and lawn care. The input process will entail the identification of the clients details concerning their location, addresses, amounts payable and prepayments. Standard codes of financial inputs or standard itemized codes can be established to cater for the clients needs (Gelinas & Sutton, 2002). Computerized accounting systems apply a shared language among computer networks to transmit information (Oganessian & Utyonkov, 2015). The input system should be designed in such a manner that the users can optimize it for efficiency. Single codes are provided to the input, for instance, the power bill or the rental bill before the transaction is automated or programmed for entry into a single or a multi-tiered accounting ledger (Oganessian & Utyonkov, 2015).
Output Requirements
Billing output from an automated accounting system should be easily understood by the intended customers. Various categories of homeowners exist, thus their bills are different. The system chosen should generate output that suit each clients expenditure details. The clients should receive a summary of the services received and the rates that apply, or any fines incurred. The late 20 percent per month on the unpaid balance, for example, should be indicated in the report generated to enable the customers to plan for their dues in advance.
Control Requirements
Billing process requires good control to ensure that the administration and issuance of bills are done accurately. The account users and agents should have passcodes to allow them access what they need to perform their tasks effectively (Gelinas & Sutton, 2002). The entire billing process will be divided into three parts namely data entry, system authentication and bill distribution. The three parts will ensure that those involved in data entry and the distribution of the bills to the homeowners do not collude with the system workers to alter any information. The division of the duties will ensure that the billing process remains clear and authentic.
Collection Processing
Homeowners remit money within 15 days of receiving their bills. The remission of dues can be easy for them depending on the mode chosen by the firm. The firm aims at optimizing the service experience of the customers by having a convenient collection system. The firm has four payment options, which are personal payments at the main office, postage, electronic and direct deposit to the bank account. Therefore, a client can comfortably choose one that suits them.
Input Requirements
Various input requirements are needed when payments have been made. The four payment modes should be captured and treated in the same way though some must be keyed in the system like the cash and postal payments. The electronic and direct deposit payments should be interlinked with the automated system such that it automatically updates itself.
Output Requirements
The settlement of clients accounts should be done simultaneously with the acknowledgment of payment. Receipts that are associated with the payments should be generated and be availed to the clients promptly via email to reduce the cost of postage. The information to be sent to the clients should be generated automatically at the click of a button or immediately after the payment to ensure promptness in information delivery.
Control Requirements
The collection process is mainly customer centered as they avail the cash to major cash collection points. To ensure that every payment is made, the system should have an error notification in case of any interference. The system administrators should also be able to query the expected total payments and note any discrepancy before it becomes a problem.
Payment Processing
The different modes of payment should be processed differently by the automated system but yield the same output. The capturing method of this information is crucial as it forms the basis for the generation of the clients individual payment schedules.
Input Requirements
The input data should detail what a customer is paying for and the amount to be paid. The payment should highlight the bill as settled or not duly settled. The various services provided determine the payment made as every service has a different rate. The amount paid and for what service will be required including the time for which is paid as well as any fines.
Output Requirements
The input used closely relates to the output. Payment information is necessary to the clients and the firm because it enables the firm to make major decisions and meet its operating costs. The output generated should offer informative and summative information that is customer specific. The output from the system should be real-time such that after every payment, the system can indicate and print out or forward an email to the customer who makes the payment. The output information should indicate the costs of all the services offered and applicable taxes.
Control Requirements
The generation of information relating to the payments made is crucial. The manner in which payment is made determines the process of input generation. Cash paid directly to the bank is automatically updated but that paid to the office has to be keyed into the system. The manner in which the cash is treated is crucial to ensure that none is misplaced and that the cash tallies with the payment keyed in the system. To control the cash, the system should generate reports for cash received and cash deposited directly. The individuals responsible for handling the cash should have passcodes so that they can be held responsible for any irregularity.
Payroll Processing
The payroll handles all the dues to be paid to employees of an organization. It contains the total days worked, the number of overtime hours, commissions to be paid, bonuses, allowances and any other payments attributed to an employee due to duties they discharge for an organization. The payroll is central to an organizations remuneration plan as without it employees cannot get their due dues.
Input Requirements
The computation of employees dues requires various input data types. The data include the terms of employment (full-time or part-time), payment mode and the payment duration (monthly, bi-weekly or weekly). The firm pays its staff using a bi-weekly plan from the clients payroll checking account. The details required for the payment are the duration or hours worked and the services offered by the part-time employees. Deductions such as taxes and medical cover among others should be done and submitted to the relevant authorities.
Output Requirements
The output of the payroll should indicate the amount payable to every employee and their employment type. The details of the amount as per the hours worked or commissions earned should be indicated. Taxes and deductions should also be indicated on the employees payslips. The output given by the system should be un-editable to ensure that no alteration is made to the final payments.
Control Requirements
The payroll forms the basis for remuneration. Therefore, any alteration or inflation can be detrimental to a firm. A specific individual should be responsible for the safe custody of the payroll for accountability purposes. Access to the payroll should be limited to those involved in remuneration computation. The authority of editing and altering it should also be restricted to prevent unauthorized editing. The amounts payable to the employees should have a different output from the payroll processing system.
Proposed Outsourcing Functions
Outsourcing of services has become a major way of lowering business costs. With the rising competition, every business wants to focus on its core business to cut a niche. The company can outsource services such as staff development, accounting system maintenance, lawn care, as well as refuse and snow removal. The development of staff involves training them on the use of the new Sage50 system that will be used after the firms merge. The need for training on usage and system maintenance will require that the firm outsources these skills. The expertise required should be inculcated to the staff from experienced personnel to optimize the use of the system. Lawn care, garbage and snow removal services are better outsourced from companies with the required machinery that the firm may not have. The disadvantage of outsourcing these services is the danger of unsatisfactory services.
System Selection
The selection of Sage50 is due to its agility and ability to be manipulated to aid decision-making. Since one firm has used the system, the firms experience can be used to make the purchase decision.
There are numerous pros of using the Sage50. The systems efficiency saves time used in the computation of accounts, which can be transferred to other activities that help in the growth of the business. The users of the system do not need to worry about downloading the latest version of the software (Kelly, 2012). Its ability to aid in the managerial decision-making process is vital as it will enable the business management to make important decisions (Oganessian & Utyonkov, 2015). The software has a wide variety to choose from with varying features to suit different business at different costs.
The availability of a free trial version is beneficial as it helps to assess the most suitable version for a particular business (Bride, 2010). The ability of the software to link the customers and the management increases their contact, which is desired for business success. Versions that compute financial statements, employee compensation (payroll) and deductions are available to reduce the work done by employees hence translating to labor savings (the cost of hiring more staff). The software capability to invoice customers and update payments reduces the risk of debts (Kelly, 2012).
The setback of using the system is that the installation of the software is challenging and takes a long time (Kelly, 2012).
Recommendation
The system is robust and has many advantages. I recommend the Sage50 as it will increase the productivity of the firm. The time saved can be devoted to more productive activities. The reports generated will help in decision-making by the management. Also, the monitoring of cash flow is simplified thereby making it easier to track the financial state of the business. The payroll system management including deductions and customer support facilitates the management of individual contacts with the business. The system should be adopted in phases to allow seamless adoption by the firms staff.
Challenges to Automation
The automation of businesses may meet certain challenges such as employees resistance to changing towards a particular system, which may make the implementation of the program difficult. The reliability of the system to the internet for updating and the yearly payments tie the business to the software provider. The reliability of the system to power and the rising threat of cyber security may also pose a threat to the security of the data stored in the system.
Conclusion
The use of an automated system is beneficial as it reduces the cost and time of doing business. The benefits of system automation outweigh its challenges. Therefore, every company should strive to automate its systems.
References
Bride, M. (2010). Get started in Sage50. London: Hodder Education.
Gelinas, U. & Sutton, S. (2002). Accounting information systems (5th ed.). Boston, MA: South Western.
Kelly, J. (2012). Sage 50 accounts for dummies (2nd ed.). Chichester, West Sussex: John Wiley & Sons.
Oganessian, Y. & Utyonkov, V. (2015). Super-heavy element research. Reports on Progress in Physics, 1(2), 36301-36302.
Three phases of the case study and their associated objectives
The three phases which are included in this case study are: phase one, phase two and phase three. The first phase entails the study of the existing management accounting system and an examination of how the costs and revenue opportunities occasioned by the environmental impacts are treated within this system. The four key issues which are considered in this phase relate to energy usage, paper usage, waste management, and water usage. It was noted that costs, which are occasioned by the environmental impacts, were treated just like the normal overheads. This indicates that the school does not have a method of ensuring responsible accounting for these costs in the current management accounting framework.
In the second phase, the objective was to examine the possibility that the costs and revenue opportunities, which were occasioned by the environmental impacts, were not being captured in the existing management accounting framework. The main purpose of this phase was to come up with ways of ensuring that these costs and revenue opportunities are captured in the system in a way that can enhance their identification.
In the third phase, the objective was to carry out a trial to determine the efficiency of the Environmental Management Accounting and compare it with the existing management accounting, which was being used in the organization. This was done to ensure that the proposed system would serve the interests of the organization better than the existing management accounting system. It was noted that the failure to record these costs and revenue opportunities in the right way resulted to a situation where the management was unable to make the right decisions. This had an impact on the productivity of the organization.
Explanation of Blackbaud school accounting and reporting system that is in operation at MLC
The Blackbaud school accounting is used to record the admission and registration of the students. It is also used to perform the accounting for non-profit making organizations. In addition, it incorporates the students records. Under the reporting function, the system is used to generate trial balance, income statements, balance sheet and the general ledger. However, the system does not allow for the generation of income and expenditure statement and cash flow forecast. These two functions can only be performed manually. This accounting system has been designed to cater for non-profit making enterprises.
The income is recorded in terms of tuition fees, fees charged on extra subjects, subsidies and also other sources of income. Most expenses are classified under administration and general overhead categories. Other classifications include: building and equipment, gardens and grounds, boarding, catering, caretaking and cleaning, information technology and health centre. These other categories are used to apportion costs such as salaries, wages and sundry expenses. The budgeting process is carried out at the beginning of the school year.
The capital expenditure function is classified in two parts namely: capital works and capital replacements. Under the capital works, the school council evaluates the relative importance of each of them and determines the capital works which are going to be carried out. This facilitates floating of tenders to determine the costs for these projects. The cost forms the basis for either the rejection or the acceptance of the projects. Capital replacements are usually proposed by the teachers. The departments determine the high priority projects, which are forwarded to the school council for approval and subsequent implementation.
Environmental impacts associated with MLCs operations and how the costs associated with the environmental impacts are treated and flow through MLCs accounting system
The environmental impacts identified in MLCs operations include: energy usage, water usage, waste management and paper usage. Since the existing management accounting system does not sufficiently record the costs associated with the environmental impacts, the costs which arise as a result of energy usage, paper usage and water usage are captured under administration and general overheads. Additionally, the costs which are associated with waste management are captured under caretaking and cleaning overheads.
The flow of those costs through the MLCs accounting system is such that they are entered directly into the expense accounts. This facilitates the apportionment of these costs to both the boarding and tuition functions based on the discretion of the person doing the coding. After the costs have been entered into the expense accounts, they are incorporated in the income and expenditure report for a particular period which shows the costs classified under the overheads.
It can be concluded that the current accounting system only takes into account the financial aspects of costs in preparing the information required in decision making. On the contrary, it does not take into account the environmental impact cost, which is crucial information that could facilitate effective decision making process by the management. According to Warren, Reeve and Duchac (2011), the failure by the management to take into account environmental impact costs has the likelihood of making the organization incur additional costs in future in order to evaluate, report, and prevent the effects of environmental impact. This could have the effect of increasing the operational costs of the organization in the long run.
Limitations of the existing accounting system with regard to cost savings and how costs can be reclassified to improve decision making.
The limitation of the existing accounting system is that it does not allow for the allocation of costs to the relevant responsibility centers. Costs due to the environmental impacts are classified under either administration or general overheads or under the caretaking and cleaning expenses. As a result, there is no motivation for the departmental heads to control or to even minimize those costs. This implies that the organization does not have effective measures to reduce or eliminate unnecessary costs.
To facilitate effective decision making, the costs should be reclassified on the basis of various responsibility centers in the school. This could either be based on the subjects that are taught in the school or the activities that are carried out to facilitate the day to day running of the school. This would have the effect of reducing the costs which are attributable to the administration function.
According to Schaltegger, Bennett and Burritt (2008), improving the process of accounting the costs starts by evaluating the existing accounting system. Afterwards, the management will need to look into the various aspects of environmental impact costs. In this regard, the organization should pursue measures which are meant to minimize costs or increase opportunities for revenue. The other process involves the proposals to improve the current accounting system with a view of making it more effective. Finally, the management can carry out a trial of the proposed changes to ensure that they are consistent with the needs of the organization.
How Activity Based costing can be beneficial to MLC
Activity based costing can help in enhancing accurate costing for the various assets, activities and products. Additionally, it can facilitate the process of assessing the performance of the employees in charge of particular functions on the basis of pre-determined criteria to avoid bias. It is also a very realistic and practical method of capturing the costs incurred in the MLC. Activity based costing uses the concept of unit cost rather than the total costs. This helps the management to identify areas that need to be looked into in order to minimize the total cost for the entire organization. As a result, it facilitates a much effective means of providing the information which is required in the decision making process.
It facilities the identification of the cost areas which utilizes both low and high costs. This helps the management to put the necessary measures in order to minimize the costs. It can also help an organization to have competitive advantage since it helps in the improvement of business processes. It also helps the management in making the distinction between the necessary and the unnecessary costs. Therefore, it can be concluded that activity based costing is a very efficient method of accounting for costs (Goektuerk 2007).
How costs associated with environmental impacts within MLC can be allocated and the limitations associated with the cost drivers identified in the study
The costs can be allocated on the basis of the activities which give rise to those costs. This would ensure that the apportionment of those costs is done in a practical manner. In order to facilitate this apportionment, the organization should identify the activities which are performed in the organization as well as the resources which are expended by each activity. This should be done in order to determine the true cost of each of the identified activities. Under the energy usage, the cost which has been identified is the light and power cost. The apportionment of this cost is going to be made on the basis of surface area as a percentage of the total combined surface area of the school.
Under the paper usage, the cost which has been identified is the photocopying cost. This cost is going to be allocated on the basis of the total number of copies made for a particular department as a percentage of all the copies made in the school.
The cost which has been identified under the water usage is the water costs. In order to ensure the effective apportionment of this cost, there were two areas that were identified. The areas include the water spent in the toilet and the water spent by the washing machines. As a result, the apportionment is going to be on the basis of the percentages of the water used in each of the two areas.
Under the waste management, the various costs which were identified include: tipping fees, document shredding costs and grease tap removal costs. All these costs would be charged to a particular responsibility centre, which would facilitate their apportionment on the basis of the floor area as a percentage of the total floor area of the school.
The disadvantage of the use of the floor area as the basis of the apportionment of the costs is that if the responsibility centre reduces its usage of a particular component, it might not result to a commensurate reduction of the costs apportioned to that particular centre.
Benefits to the responsibility centers within AMP from maintaining records on both energy and water usage
One of the benefits of the responsibilities centers is that they allow for easy identification of the relevant costs. In addition, apportionment of costs on the basis of responsibility centers allows for the right decisions to be arrived at regarding the best ways of minimizing those costs. It can be argued that the relevant departmental heads would be in a better position to control those costs. This would have the implication of ensuring that the financial statements produced would accurately portray the true actual costs.
Moreover, allocation of the costs to the relevant responsibility centers facilitates the apportionment of those costs to the relevant sub centre. This enhances efficiency of monitoring those costs. Therefore, the school will enhance its cost reduction and revenue generating opportunities. This will have the effect of minimizing the costs for both the energy and water usage. As both the water and energy cost comprise a huge component of the total cost for the organization, it will result to grater profitability for the organization.
Furthermore, the allocation of costs to the responsibility centers facilitates cost planning. This ensures that the company does not incur unnecessary costs which affect its profitability. It also helps in improving the overall performance of the entire organization because the relevant departmental heads are aware that they will be assessed on their performance on the costs which have been charged to their departments. It also helps the organization to groom its employees to take more challenging roles in future by giving them an opportunity to be in charge of a small part of the organization and thereby honing their leadership skills (Leung 2011).
How MLC could develop additional records for identifying, allocating and managing the costs associated with waste and how the associated financial benefits should be accounted for
Currently MLC does not have sufficient records which can aid in the identification and apportionment of the management waste costs. In order to effectively manage the costs associated with waste management, the school should consider the following: Firstly, the management would need to consider the time spent by the staff in attending to the waste management issues. This would help the management to develop records which would help them to account for the time wasted as a percentage of the total time. This would facilitate the effective apportionment of this time to waste management.
The cost incurred to purchase the equipment, which is used for the purpose of ensuring the efficiency of waste management activities, should be looked into. Therefore, MLC should have records which capture the costs of these assets. Another cost that would need to be allocated to waste is the cost incurred in training the employees on the effective waste management practices. For this reason, the management would also require other records to capture the costs incurred in training the employees.
The management would also need to consider the cost of the waste materials which should then be allocated to waste appropriately. The records adopted should be such that the cost of the waste materials is appropriately captured. As a result of these measures, any benefits which are realizable under this plan should be attributable to the responsibility centre which facilitated such benefits. The benefits accruing from this approach should help in reducing the costs incurred in waste management, which would result to a corresponding decrease in the total costs for the organization.
How a life cycle costing system (LCC) could be implemented within MLC and the environmental impact issues that would need to be considered and costed within the LCC exercise
The life cycle costing system (LCC) can be defined as an accounting method, which attempts to record all the costs associated with a particular asset or product over its useful life. In the implementation of the LCC, the school would need to carry out a thorough analysis of all the projects that they need to undertake. This would be a complete departure to the past where the decision to commission the commencement of a project was wholly dependent on the cost of acquisition.
Some of the issues that would need to be considered in capital budgeting would include: the cost of acquisition, finance costs, maintenance costs, operational costs and the cost of disposal. This would ensure that the decisions regarding a particular project will be arrived at after taking into account the aforementioned issues. This would aid in effective comparison of competing projects and eliminate the possibility of engaging in projects which could end up being very expensive to maintain in the long run.
This approach would result into substantial saving in terms of environmental impacts costs which would arise as a result of the operational, maintenance and disposal stages in the life of the that project or asset. Some of the issues which could be captured aptly by this approach include disposal issues, energy usage issues, the need for efficiency in operation of the assets, the requirements for maintenance, and consumptions needs for the assets. This would be a very efficient way of ensuring that the organization minimizes the environmental impact costs. This would result to effective utilization of the resources at its disposal because of the massive savings which would come as a result of using LCC in decision making.
Reference List
Goektuerk, H 2007, ActivityBased Costing(ABC)Advantagesand Disadvantages, GRIN Verlag Publishers, Norderstedt.
Leung, D 2011, Inside accounting, Gower Publishing Ltd, Aldershot.
Schaltegger, S Bennett, M and Burritt, R 2008, Environmental management accountingfor cleaner production, Springer Publishing company, New York.
Warren, C Reeve, J and Duchac, J 2011, Accounting, Cengage learning Publishers, Hampshire.
I never understood why some people say that accounting is boring. I find it rather exciting. My interest in finance developed many years ago. As a kid, I used to earn my pocket money for doing some household errands. Back then, I realized that saving a portion of what you earn and thinking properly about better opportunities to spend it are wise decisions. From my earliest experiences of dealing with money, I knew that planning the expenditures pays off as you seldom find yourself broke and more often find yourself able to afford anything you need. It is a simple thought: one should plan their finances. However, I have learned that not everyone manages to comply with the simple principle. I have observed people struggling with money issues although they earned enough. I believe that often the problem is the lack of organizational skills. What I mean by that is that some may indulge in excessive spending as if they do not realize that it will not end well. I think that this basic understanding of the importance of financial planning is what initially made me interested in the profession.
Main body
Later, of course, I discovered that the area of accounting and finance is much more complicated. But the fundamental principle is the same: income, profit, costs, expenditures, turnover, and other financial indicators need to be properly calculated, planned, and systematized. I strongly believe that any activity that somehow involves spending money, paying, selling, or buying is doomed to fail unless its finances are properly managed. However, I also believe that accounting and finance professionals should be able to do more than calculate. There is a range of skills and abilities that make a good professional in the area. After studying accounting and financing for a while and reflecting on my achievements, I think I possess the necessary characteristics.
First of all, an important feature for any professional is self-management. When one faces a large challenging task, it is necessary to establish what needs to be done to fulfill it and ensure that proper actions are taken. Completing a challenging task takes determination. I learned it the hard way. Back at school, I was on the organizational committee for an event held by the school administration for the local community. We had a thoroughly designed plan for the event, and I remember being excited about implementing it. But when we started the preparation, things kept falling apart. Several key participants suddenly refused to come. The venue turned out to be inadequate, so we had to urgently find a new one. The technical equipment needed for the event broke down. We constantly had to make new decisions and come up with changes to adjust the initial plan to the circumstances. It was stressful and frustrating. I wanted to quit many times. However, I told myself that the project had to be finished. I kept working and resisting distress, although two other members of the committee gave up and quitted. I knew that the event was important for my school, and it kept me going. The event went well, and the participants did not even realize how much hardship the organizational committee had been through. That is when I learned how important determination is: once you start something, you need to work hard on it despite the difficulties.
Besides keeping ones spirit up, self-management is also about some skills that are necessary to ensure successful performance. One of them is time management. I am not used to putting things off and waiting for the last minute to do something. For me, any project starts with defining milestones and setting deadlines for myself. I strongly believe that time is a valuable resource and spending it on things that do not contribute to the success of a project is the same as wasting money to buy something unnecessary.
Another crucial skill is communication. When organizing that same event, I had to communicate a lot with students, teachers, school administration, parents, and members of the community. I think it was my first experience of professional communication, and I made several unpleasant discoveries. Some people made promises that they did not keep. Others could not express clearly what they wanted. When asked five questions in an email, a person answered only the last one. One of the participants grossly misunderstood what her role in the event was because, according to her, my explanations had been misleading. Also, I did not completely understand one of the tasks given to me and, instead of clarifying, assumed how to do it and ended up doing it wrong. All this helped me realize how important it was to make sure that everyone involved in the preparation project understood the project goals and understood each other. That is why I started paying much more attention to communication. As a result, by the time of the event, the participants were aware of what the role of each of them was.
Conclusion
Since I have good self-management characteristics, communication skills, and aptitude for accounting and finance, I think I will become a good professional. I am at a crucial stage in my life when I am laying the foundation for my future career and success. I recognize that the most important thing for me now is to study and to work hard to learn as much as I can. Although the profession I have chosen is highly challenging, especially in the modern world with its economic situation, I want to fully engage in it to contribute to the development of my country. In the UAE, a wide range of opportunities is open to young practitioners in the sphere of finance because the countrys economic growth requires well-educated and competent accounting and finance professionals. After graduating, I am planning to work in the government sector. I pursue two goals: fulfilling myself as a professional and promoting the well-being of my country. I believe that working in the government sector will help me achieve both goals.