New Accounting Rules and Profit Boosts Reported by Dish Network – May 09, 2018
The article focussed on the impact of changes in accounting rules on the reported profit of cable network in the United States of America (US). The new accounting rules allow the cable networks to recognize revenue from contracts immediately subsequent to the delivery of promised goods and services to the customers. The new rules has become mandatory from 2018 onwards to improve the comparability of revenue and performance of cable networks of different fiscal periods. The benefit of the new accounting rules is that these are uniform standards applicable to all the public companies operating in cable industry. Compliance with the accounting rules will thus, make it easier for the users of financial statements to compare the financial performance of a network with another network (Schaltegger & Burritt, 2017).
Earlier the incentives payments made by the cable networks to third party retailers were charged to the profit and loss account immediately subsequent to the payments as the incentives were considered incurred. However, adoption of new standards has made it compulsory for the cable networks to defer such incentive payments over the average customer life. As a result the profits of cable networks have positively influenced including that of Dish by $27 million. However, despite such positive impact on net income of Dish, it is still down by 2% in the latest quarter compared to the corresponding quarter of previous year. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have developed and issued the new standard in 2014. A prudent estimate has suggested that an increase of 15% revenue has been experienced by companies adopting new standards (Krahel & Titera, 2015).
The new accounting rules required the financial institutions, banks and other loan providers to recognize losses from bad loans quicker than required in earlier accounting norms and regulations. Being one of the largest student loan providers in the US, Navient Corporation has prepared for new accounting rules to ensure compliance with the new accounting rules. By 2020 these rules shall be in effect for public limited banks and for private banks these will be mandatory by 2021. In order to ensure adherence to the new standards to recognize losses from bad loans quicker, all finance companies in the country are conducting necessary exercises to ensure smooth transition to the new accounting rules (Agénor & Zilberman, 2015).
The aim behind the new accounting rules is to ensure there is no delay in recognizing losses from bad loans by finance companies. The stakeholders of finance companies shall be provided with financial information about the companies that would help them to correctly assess the financial performance and position of these companies subsequent to the new accounting rules coming into effect.
Innovation and technology has touched each and every facets of human lives and business. With the constant focus on improving the technology it has become almost impossible for human to keep pace with new innovation and technological development. The Artificial Intelligence, here in after to be referred to as AI in this document, has made the job of accountants and other professionals much easier. In fact accountants and other professionals have shifted more to the roles of advisers with the difficult tasks are been performed by AI.
Navient Readies for New Accounting Rules on Bad Loans – The Wall Street Journal, July 31, 2018
Number of accounting tasks including book keeping, data entry, and data categorization are already performed by AI. Analysing financial trends have become much easier with AI. Though the approvals are largely left to the human beings however, the expert service provided by the AI has helped in improving the quality of accounting and financial reporting.
The effects bad audit on the financial reporting and its quality as a whole is hugely disastrous to the trust of the users of financial statements. Number of frauds and scandals in the country have highlighted the inadequacies in the system. The ineffectiveness of the auditors to control misstatement in financial statements even after auditing has led the inventors in the wrong way in taking important business decisions by using misstated financial statements (Laudon & Laudon, 2016).
FASB along with IASB has the responsibility of aligning the global accounting standards to close the existing loopholes in the accounting rules and regulations to improve the quality of financial reporting. The importance of Fair Value Accounting is thus even more important to disclosure of true and fair financial position and performance of an entity in the financial reports.
After 119 years since its incorporation, Barclays decided to change its auditors and held an audition to appoint a new audit firm by severing ties with PwC. The audition was expected to be a competitive war between auditing firms as not only this was a prestigious audit but the bank also offered one of the highest auditing fees to its auditor, PwC, in last financial year with an astronomic figure of GBP 44 million as audit fees. However, KPMG was selected as the auditor of Barclays without much competition.
The hidden conflicts between the big 4 audit firms were the main reason that the much awaited audition for selection of auditor of one the prestigious banks ended up without much competition. Absent of competition is a very big worry for the quality of auditing as the big 4 firms are dominating the auditing scene in all across the globe. The reliance of auditing firms on consulting fees have created conflicts between the responsibility of a firm in discharging its responsibility as auditor and discharging its responsibility as a consultant (Brusca, Caperchione, Cohen & Rossi, 2016).
The big four auditors in the world, EY, Deloitte, PwC and KPMG, have a much easy life as compared to the other audit firms in the world. Until 2002, when Arthur Andersen was also recognized as on the big audit firms in the globe to make it a big five instead of current big four auditors, the competition has reduced even further. As a result the competition for big audits have been relatively much less in the country and around the globe with only big four firms are there to compete for the post of auditors. One of the reasons of letting off KPMG with simple fine despite founding to be involved in illegal tax schemes in the US is due to the clout of the top audit firms in the country (Sutton, Holt & Arnold, 2016).
AI’s Impact on Accounting and Finance – Forbes, September 10, 2018
The audit quality has negatively influenced due to the ease with which big 4 audit firms have operated in the country over the years. There has been much less pressure on these firms to perform audit efficiently due to the lack of competition. Thus, some perceived threat must be there to push these big audit firms to perform better than they are performing under much less pressure and competition.
With increase amount of automation in each and every facets of business management it has become easier for executives of business organizations to free up capacities by making use of the features of automations. The study conducted by Accenture Strategy revealed that it can be expected that within next three years more than half of all the tasks in finance departments will be automated. The capacity that will be freed from automation shall be deployed in development of business entities by Chief Financial Officers (CFOs). It is expected that 45% of the finance tasks in global companies will be done algorithms and robots by the end of 2021. As a result, there would be significant freeing of capacity in global organization with machines doing most of the tasks in finance. It is up-to the CFOs to make effective use of freeing capacity with increased amount of automation in business (Pannu, 2015).
Again in this article the ever increasing use of artificial intelligence, robots and chatbots in accounting and finance have been explained. The digital transformation has led to a huge increase in use of advanced technology in maintaining books of accounts and other aspects of accounting and financing.
Increasing reliance on machines, artificial intelligence and advanced tools on various aspects of accounting and auditing has transformed the process of accounting and auditing significantly. From expense management to auditing, digital transformation has positively influenced accounting and finance (Hope, Thomas & Vyas, 2017).
The expectations from auditing are different by different stakeholders. Law makers, companies, investors and other stakeholders all have different expectations from audit. It is only when things go wrong that the faults of auditors are noticed. The scathing attack of British MPs on the inability of KPMG to disclose the misstatements in the financial statements of Carillion almost suggested that the reason behind the collapse of the contracting company was the auditor of the company, i.e. KPMG. Deloitte and PwC are also facing similar charges in different countries including a two year ban to the later in India (Balkaran, 2016).
It is not only the courts and law makers that are turning the heat on the audit firms but also the investors who have for long showed their complete trusts on the choice of auditors by the management now waking up to audits and their ineffectiveness. More than one third of the shareholders of General Electric voted against the reappointment of KPMG as the auditor of the industrial conglomerate in last month.
The hefty pay cheques of auditing paid by the companies along with other consulting services which are providing by all the big four audit firms to their clients have certainly influenced the way they treat the financial reporting of these companies. The auditors including the big four, KPMG, PwC, EY and Deloitte, have all been accused of showing leniency to their clients while scrutinizing the financial reports of these companies. Conflicts of interests is a serious concern that have for long shadowed the dodgy accounting practices by companies from the wrath of auditors (Cook, van Bommel & Turnhout, 2016).
Restoring Trust in Audit by Reforming the Accounting Rules – Financial Times, August 02, 2018
The smallest of the big four audit firms, KPMG has recently been involved in one of controversies for signing the accounts of Carillion that busted subsequently. Thus, the inability of the audit firm to unearth number of misstatements in the financial statements of the company have raised the issue of quality of auditing. The lawmakers in England have heavily criticized the audit firm for signing the accounts of the contracting company that collapsed subsequently.
A Chief Financial Officer (CFO) has number of issues to look after in order to ensure efficient functioning finance department within an organization efficiently. The article discusses the importance of 4 issues that CFOs must ponder in order to ensure efficient operations of finance department. The four issues are as following:
Strategy within an organization shall be made by keeping in mind the various risks that the entity is expected to face. In case of finance department within an organization, CFO must consider the different risks and make an appropriate strategy accordingly to deal with the enterprise risk (Whittle, Mueller & Carter, 2016).
It is recommended to have a separate post within the finance department with the designation of Chief Risk Officer. The officer will be responsible to identify the different risks within the enterprise. This will help the CFO to conduct the functions of Finance department effectively.
Hedging opportunities must be identified and necessary decisions shall be taken to make best of use of hedging opportunities to maximize the gain or minimize the losses on financial instruments.
Necessary training shall be provided to the employees to impart them with necessary knowledge and skills required for identifying phishing schemes and take appropriate actions to ensure there is no repetition of such phishing schemes (Knechel & Salterio, 2016).
The auditing is the process of independent verification of financial statements of an organization by independent auditors professionally qualified to conduct such audits with an objective of expressing an opinion on the financial statements. The financial crisis of Goldman Sachs was mainly due to the accounting dispute and the inability of the auditors to identify the misstatements in financial statements of the entity.
The accounting standards setting body in the UK over the years have continuously evolved the concept of accounting with the objective of improving the ability of accounting records to disclose the financial performance and position of an organization correctly in financial reports. Replacing the historical cost accounting with progressive introduction of fair value accounting is one of the main tool in the hands of the accounting standards setters to improve the quality of accounting and financial reporting. The objective of providing useful information to the users of financial statements will be achieved by the use of fair value accounting concept as it shows the expected market value of assets and liabilities instead of historical costs of these assets and liabilities.
A string of accounting scandals where it has been discovered later that overstatement of profits in income statement and inflated assets in the Balance sheet have fuelled the concerns about the quality of auditing and effectiveness of auditing. Especially the fact that in many cases the ineffectiveness of big four audit firms in identifying the material misstatements in the financial statements have led to collapse of number of entities, have raised serious concern about auditing. The profit driven strategy of auditing firms including that of big four has serious implications on the performance of the audit firms in relation to their clients. In order to ensure that the regulations for auditing are effective Britain has started and investigation on auditing regulations in the country. However, an in-depth investigation is essential otherwise the whole exercise might turn to be futile as this will end up in looking for symptoms rather than the root cause of the issue associated with lack of quality and assurance in auditing services by the auditors (Knechel & Salterio, 2016).
Conflicts that Mire the World of Audit – Financial Times, August 09, 2018
It is important to understand that the objective of preparing books of accounts for an organization is to mainly provide useful financial information to the stakeholders of the organization. The idea is to report and true and fair figures of revenue, expenditures, assets, liabilities and equity in the financial statements. The banking crisis in Ireland was mainly caused due to the non-disclosure of billions of losses in the books of accounts despite clear indication of such losses in the financial environment of the banks.
Prudence in accounting is a concept that has for long provided the users of financial statements with useful information about an organization and its operations. Despite the progressive shift to Fair Value accounting concept from Historical accounting it is important to return to prudence to restore the faith of the stakeholders in accounting. The concept of prudence suggests that all potential losses must be provided in the books of accounts to ensure that the accounts shows the true and fair picture of all possible liabilities of an organization. Returning to the concept of prudence would obviously ensure that all possible expenditures and losses are recognized in the books of accounts to enhance the trust of the users of financial statements.
Conclusion:
Accounting has evolved over the years with continuous focus on improving the quality of accounting and financial reporting. Number of accounting scandals have hit the corporate world however, that does not reduce the importance of accounting. The auditing as a process of independent verification of financial reports however, must be improved in order to unearth the material misstatements in financial statements. The inability of the auditors to identify material misstatements in financial statements have resulted in lack of trust by the users of financial statements on accounting and auditing. But the importance of accounting and auditing has not diminished in the modern business world.
References:
Agénor, P. R., & Zilberman, R. (2015). Loan loss provisioning rules, procyclicality, and financial volatility. Journal of Banking & Finance, 61, 301-315.
Balkaran, L. (2016). The Importance of Auditing Your Company’s Strategic Plan. EDPACS, 54(3), 1-10.
Brusca, I., Caperchione, E., Cohen, S., & Rossi, F. M. (Eds.). (2016). Public sector accounting and auditing in Europe: The challenge of harmonization. Springer.
Cook, W., van Bommel, S., & Turnhout, E. (2016). Inside environmental auditing: effectiveness, objectivity, and transparency. Current Opinion in Environmental Sustainability, 18, 33-39.
Hope, O. K., Thomas, W. B., & Vyas, D. (2017). Stakeholder demand for accounting quality and economic usefulness of accounting in US private firms. Journal of Accounting and Public Policy, 36(1), 1-13.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Krahel, J. P., & Titera, W. R. (2015). Consequences of Big Data and formalization on accounting and auditing standards. Accounting Horizons, 29(2), 409-422.
Laudon, K. C., & Laudon, J. P. (2016). Management information system. Pearson Education India.
Pannu, A. (2015). Artificial intelligence and its application in different areas. Artificial Intelligence, 4(10), 79-84.
Schaltegger, S., & Burritt, R. (2017). Contemporary environmental accounting: issues, concepts and practice. Routledge.
Sutton, S. G., Holt, M., & Arnold, V. (2016). “The reports of my death are greatly exaggerated”—Artificial intelligence research in accounting. International Journal of Accounting Information Systems, 22, 60-73.
Whittle, A., Mueller, F., & Carter, C. (2016). The ‘Big Four’in the spotlight: Accountability and professional legitimacy in the UK audit market. Journal of Professions and Organization, 3(2), 119-141.
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