Accounting Policy Choice and Creative Accounting
Discuss about the Creative Accounting Practices at the Satyam Computers Limited.
Accounting methods are a set of regulations and rules that are used by an organization during the preparations of its financial statement which entails the manner it reports the revenues, expense and any other relevant financial recording. Accounting methods can be categorized into two accrual accounting methods and cash accounting method, the choice between those accounting methods depend on the organization management and the laws that are dictated by IRS.
There is need for choice between the available accounting policies and standards that is best for the company or organization without engaging on illegal activities (Jones, 2011). The choice between accounting policies will depend on the decision of accountants, shareholders and management by the organization either during its foundation or as it continues to operate. In some pubic institution the choice is dictated by the government.
Financial statement has engaged in creative accounting where the financial statements and annual reports especially in finance provide false information with the aim of deception or providing a false perception which could be due to various reasons. Henderson et al. provides hypothesis for this reason.
The choice of the best accounting policy is always on managers and financial preparers and as mentioned they might engage in certain opportunistic behaviors for their own benefit in the expense of the shareholders and other stakeholders but this could be prevented using contract as this paper will explain in the second part.
Most small organizations go for cash accounting method because it is simple and because of how the statements are recorded, in this method expenses are considered in the year that they are paid unlike in accrual accounting method where the timing of revenues and expenses is according to the year the contract is signed.
Once the choice of accounting policy is made it is very difficult for changes to be made to another accounting method or policy unless authorized by IRS because changes in accounting policy could affect the whole organization operation. This paper examines Origin Energy limited in orders to identify creative accounting policy and its reasons while identifying the opportunistic behaviors by mangers and their causes.
Origin Energy company is a public energy company which was founded in the year 2000.With its headquarters in Sydney it provides services such as electricity, solar panels, naturals gas, electricity, cooling and heating and vehicle charging.
It has employed above 6000 employees in 2016 and it has had a difficult time regarding losses with the largest one being on 2015 where they recorded a loss of $658million and a net income of $12.174 million.
Creative accounting is the occurrence of generation of statements from accounting policies in producing a certain impression to the shareholders and the stakeholders (Khaneja & Bhargava, 2017). This creative accounting methods produce unreliable and inaccurate financial statement but has not yet been classified as being illegal. Accounting policy are regulations that entails how a company prepares its financial statement. In Origin energy limited I will lock at the three examples of accounting creativity which are: estimates or perdition of the future events, disclosure of events and accounting policy choice.
Creative Accounting Example No.1: Disclosure of transaction or events
Creative accounting can be seen when the organization confuses the focus of the people from issues that really matter by use of material or any other focus. This method has been used by the organization to confuse the shareholders and the stakeholders and the object that has been used in changing this focus from issues like problems in the market is the company’s prosperity, this company is among the best energy companies in the with a profit of $834 million, it also spent $1billion to reduce its debts (Tassadaq & Malik, 2015).
The larger part of the report is on the performance and financial analysis focusing on the success of the company neglecting other important issues such as the reduction in the need for some petroleum projects as a result of increase in technology, there market has thus reduced and an example can be seen in the reduction of the products that they supply in Chinese as the country continues to embrace technology, despite all this they have not indicated this in their annual report strategy as important as it since it could affect the company’s future.
Some shareholders and stakeholders make their decisions based on the predictions of future operations and profits in the annual report of organizations sine it indicates the future of the organization whether positive or negative, the annual report of Origin Energy indicates that they are among the best companies in Australia making huge amounts of profits almost as their rivals Energy Australia and AGL (Piper, 2016).
When observing the annual repot of the company however it can be seen that the company has engaged in creative accounting particularly observing the effects of debt and reduction in the market of their products in their organizations, it has been noted that there is an increase in the company’s debt since the year 2012 and the market of their products has continued to decrease as an example indicates in the Chinese government even as the annual report continues to indicate stability in the manner in which the company deals with debts, this major issues that should be included in the report but have not yet been included thus showing the creative accounting method to conceal this truth so that investors can see that they are prospering to invest more yet there are issues that they need to deal with.
The choice of accounting policy should be relevant and reliable according to AASB 108, this is a factor that every financial statement preparers needs to consider, there are situations when financial preparers decide to be creative in that they may choose policies that are manipulative an inaccurate in the manner it reports its financial statements the same situation is seen in the case of Origin energy in the manner in which they present its financial disclosure which is key in the influence of the shareholders and the stakeholders. Creative accounting is seen in the neglection of the company to write down some liabilities in their financial statement (Mulford & Comiskey, 2011), some of this liabilities that have been problematic to this company are debts. The report indicates that the debts have been dealt with while this has been a problem for the company since 2012. This creative accounting method provides the perception that the company is doing well while in real sense there is increase in liabilities and
Creative Accounting Example No.2: Estimates of future events
Commercial organizations are always focused on the maximization of profits (Ijeoma, 2015) with the improvement of share prices and dividends to the shareholders at the same time maintaining their salaries and status. This is the same case to all the creative accounting methods by Origin Energy limited though every creative accounting behavior can be attached to a specific reason. These reasons are discussed below based on Henderson et al. hypothesis.
The main reason behind Origin energy failing to disclose some transactions or events which are key in the future of the organization such as the debts and the market changes can be attributed to contractual motivation where the statement preparers are concerned with their own self-interest in considering the amount that they may lose, they therefore prefer generating deceiving financial statements provided they are able to save themselves form problems that may arise when the shareholders and the stakeholder. There are actions are selfish and based on their own self-interest without considering other important people in the organization who might suffer for their actions (Melo, Pereira & Souza, 2014).
The motivation behind Origin Energy failing to disclose some issues that could affect the organization in future is in line with income smoothening theory even as they face issues such as huge debts and increase in the technology in the society thus reducing the need for their energy products, the statement preparers are against and they do not want they shareholders to see that the challenges they are facing in their estimation of the future because if this people see they will definitely lose their benefits ,another reason for creative accounting method can be attached to capital market motivation in that they know that if they disclose this issues they will reduce their revenue obtained from the market and the investors and shareholders will also reduce their investment in the company.
The motivation behind the using this deceiving policies by this organization which show an increase in the company’s profit as it increases its assists and continues to deal with the liabilities can be due to capital market motivation where in an effort to continue receiving the benefits, salary and allowances that they get from the company they have to deceive the shareholders and the stakeholders who might decide to withdraw their support for the organization if they are made aware of the situation. These accountants are afraid that if they try and disclose the problems that are facing the organization to the shareholders and the stakeholders they may end withdrawing their support and funds form the organization thus leading to reduction in their shares a situation which will result in decrease in the remuneration and other benefits received by the financial preparers. (Bora & Saha, 2016).
As mentioned above the accounting policies continue to change and increase rampantly which prompts for the need of decision making (Rajput, 2014). Opportunistic behavior are scenarios where the decision-making choice by the mangers is motivated by meeting of their self-interest without consideration of the effect of their decision on others like the shareholders and other stakeholders including the fellow employees.
Creative Accounting Example No.3: Choice of accounting policy
In some of its branches origin energy has had mergers, there by maintaining the mangers and some employees of those organizations, this has been a big challenge to the organization in other cases resulting to demerges (Maltritz, & Wüste, 2015) because the managers who they retain for this organization have elevated their self-interest over the interest of their own company using the opportunity that they must increase their salaries every time there is an increase in the profit. This behavior could be attached to inadequate policy on the increment of the salary to the employees or poor performance by the board to limit the behavior of this managers, there is need to deal with this problem since it may dominantly continue unless dealt with.
They may use bonding to limit the manager in the merges or those planning to engage in any other opportunistic behaviors example those that take a lot of the company money which could include spending a lot of the money on purchasing expensive cars for commutation. Another method that could be used to deal with this is a contract, it could clearly show how the payments to the mangers should increase and in this case a portion of the managers salary could be attached to the income of the manager so that if he wants more money as remuneration he also must work harder in providing the company with greater profits.
Conclusion
In summary the increase in policies and standards may continue to be a problem to some organizations especially if decisions regarding the choice of policies are not made correctly, this continues to be a threat to companies since the statements preparers are also determined not to lose their jobs at the same time meet the expectations of the shareholders and the stakeholders (Tassadaq, & Malik, 2015). Even in trying to cope with the pressure for the stakeholders and the shareholders a balance should be found in their dealings so that they do not have to lie concerning such issues to the extent of using relative accounting, these methods continue to discourage the relationship between the management different key parts in an organization resulting to agency problems (Momamani, 2013). This problem is likely to escalate even to greater problems as the policies increase else a lot of companies will be dissolved if this method of creative accounting can no longer be used to hide this problem
Looking at Origin Energy a public energy company, there is need to deal with this practice of creative accounting and the best way that this could be done is by use of review of the policies by the management and adjuring o a more favorable one, the financial preparers also need to face the shareholders and the stake holders in truth regardless of their reaction to foster transparency and trust among them. The problems that are facing this organization has been attributed to greatly by the managers in the organization, there is therefore need of promoting values in the organization in dealing with this hypothesis that influence boteh creative accounting and opportunistic behaviors.
Reference
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