The negative implications of unethical accounting practices
1). The major challenge that is faced by most of the organization in the recent times is to convey the information to its non-financial stakeholders. The company’s financial performance is to be transferred to non-financial employees in a very meaningful and interesting ways. Recently, a group of former partner of the accounting leading organization KPMG obtained relevant information and misinterpreted the information (Goldstein, 2018). According to the reports, the vital data related to the upcoming audit inspections was obtained beforehand. The information was manipulated to pass the inspection. The misconduct came as highly shocking and egregious to their people. The upper level management actually steals the audit examination information so that together audit deficiencies cannot be disclosed.
Since the implosion of WorldCom and Enron, such accounting practices at KPMG created a negative impact on the mind of the people. The accountants at Public Company Accounting Oversight Board and KPMG that regulates the activities of auditors in US has allegedly received or passed information. They helped the firm to prepare their audit inspections that included at least seven banks. The informationwas allegedly passed to one member to another in such hope that they could easily get a job in the company. The accountants engaged in such misconduct to get such passing grade by all the audit inspectors. The employees working at PCAOB took the information when they were hired at the KPMG as per the charges filed against them (Shubber, 2018).
It is important to get the clear idea of the problem that was the major cause for such problem in the upper level of management. KPMG also took various remedial actions to assure so that such kind of cannot happen again in the future. The companies are accountable to various stakeholders including partners, customers and investors. It is important for the shareholders and investors to know the true position of the company as such kind of financial information is highly important for the achievement if sound investment decisions. The customers are entitled to know the true financial position of the company so that they can enter into such transactions that are related to the longevity of the company (Amidon, 2018). It is important for the customers to know the solvency and stability condition of the organization.
Ethical and honest accounting practices helps to create a positive environment for the business. When an organization or its employee’s practices unethical accounting practices, they lose their trust for their existing and potential customers. It is highly important with all such industries that completely depend on effectiveand strong professional relationships with their customers. The KPMG scandal led the employees to surrender their license for practicing unethical approach to increase profit. The credibility and reputation of the organization is completely compromised.
The KPMG scandal and the need for proper behavior and ethics
It is the legal obligation of the company to report on the financial information in a fair and accurate manner. The inaccurate information that is provided to the tax agencies can sometimes lower the organization tax burden but ultimately leads to high fines and charges against the firm. Therefore ethical accounting practices enable the organization to get their tax forms properly assessed (Brown, Preiato & Tarca, 2014). This helps the organization to have a clear conscience and further keeps the matter out of trouble. It is the duty of the upper level management and the accountants that the sound planning is made with accurate information. The obligation also includes in facilitating adequate information and furthermore it should be provided in a particular timeframe. The broad staffer has to further take confidential information from PCAOB shared with their partners at KPMG. This had led them to struggle for improving their inspection results.
Integrity is an important fundamental element of the accounting profession. Integrity requires accountants to be honest, candid and forthright with a client’s financial information. Accountants should restrict themselves from personal gain or advantage using confidential information (Dillard & Vinnari, 2017). While errors or differences in opinion regarding the applicability of accounting laws do exist, professional accountants should avoid the intentional opportunity to deceive and manipulate financial information.
Integrity is one of the most crucialpart of the accounting profession. The accountant should be candid, honest and forthright regarding the client’s financial data. Accountants need to restrict itself from advantages or personal gain by using confidential information. The differences in opinion or errors regarding their application for accountability does not actually exists (Baboukardos & Rimmel, 2016). Therefore, it is important for all such professional accountant should not avoid this opportunity to manipulate and deceive such financial information. The private companies or the public accounting firm should often develop ethical conducts and such codes for their accountants. The conduct and ethical rules should ensure that the entire accountant should act in a more consistent manner. When the specific standards or rules are inadequate within the firm, the accountants should review their actions and ensure that accepted principles are followed.
The accounting industry actually limits their services accounting firms and certified public accountant (CPA) and offers their clients. The upper level management needs to be perform more effectively should compromise their independence and objectivity. The people performing accounting functions and has to audit such information by reviewing their own performance. This furthermore leads them, to hide all such negative financial information for their company.
The importance of financial reporting and accurate financial information
Generally Accepted Accounting Principles (GAAP) should be reviewed by the accountant and such framework should be applied by the company. Due care are all such ethical values that makes the accountant to review all the ethical and technical accounting standards. Therefore, clear understanding of all the financial information so that accountants exercise competences.
Proper behavior and ethics is highly important for managing the organization and it gives the accountant a great deal of power relating to their clients (Shafer, 2015). It is vital for the firm to have certain business ethics that can be considered as the codes related to values, morals and principles. This governs their decisions and actions related to the organization. This covers generally all the broad elements from corporate social responsibility to corporate governance. The firm should have their own guidelines and moral principles. This helps them to attract and retain all the employees, investors and customers. For each and every organization one of the crucial assets is reputation. It is important to build a positive reputation with an ethical and consistent behavior. The shareholders and potential investors are more likely to get attracted to the organization that adheres to the moral guidelines of the company. This also makes the company share prices very high (West, 2018).
Under Section 100, a professional accountant has to generally adopt the following fundamental principles:
Integrity: the individuals dealing with the financial matters or issues should be clear, honest and straight forward in providing information related to all kinds of business and professional relationship.
Objectivity: the accountant should not let any kind of undue influence, bias or conflict of interest to overstate the business or professional judgments (Thomson, 2015).
Professional Competence as well as Due Care: the professional accountant has continued all the duty so that professional knowledge should be related to current developments in legislations, practices and techniques. The employees should act diligently and as per the applicable professional and technical standards while providing their professional services.
Confidentiality: it is the duty of the accountant to respect the information confidentiality gained as the result of business and professional relationships. The information obtained should not be disclosed to the third parties. Unless there is a professional duty or right to disclose the information, it should not be disclosed.
Professional behavior: the accountant should comply with all the adequate regulations and laws. Actions should be avoided that discredits the professions of the accountants (Ho et al., 2015).
Business must be committed to operate in an ethical foundation by retaining a positive environment. This is possible with effective treatment of employees as well as good marketing practices that relates to the treatment of customers and also its prices. Employees always want to work for such business firms that have a strong business ethics and a long-term goal (De Colle, Henrique’s & Sarasvathy, 2014). This helps in increasing the productivity of the employees besides reducing the turnover rates of the labor. When an individual follows the company moral policies and guidelines, with honesty and integrity it actually helps the organization to prosper.
The importance of professionalism in accounting
It is the responsibility of the Human resource department to make sure that all of its employees are highly equipped with effective tools. This would enable them to perform and implement their actions in amore ethical manner. Organizations that recognize the need of business ethics required to protect itself from all kind of external and internal risks (Benson et al., 2015). This approach helps in both the risk and cost reduction of the company.
2). The international Accounting Standards Board in their exposure draft proposes to amend the changes related to Accounting Error and Estimates and Accounting policies. The board expects that such amendments facilitate voluntary changes related to the accounting policy. The changes will facilities in improving the quality of the financial reporting.
Applying the IAS 8, the organizations accounting policy would be changed if the IFRS standards allow such kind of changes within the organization. This changes results in the improving the usefulness of all such information that is provide to the users about the financial statements. The objectives of the explanatory material that is included in the agenda facilitates higher amount of consistency due to the application of IFRS standards.
Applying voluntary changes related to the accounting policies can makes the agenda decisions quite challenging in certain situations. This is due to the fact that IAS 8 requires an organization to apply such voluntary changes in their accounting policy to such an extent that it is impracticable.
The IASB board wants to amend IAS 8 by introducing new kind of voluntary changes within the accounting policy. This results from the decisions of the agenda, which is published by the IFRS Committee. The proposed threshold initiated by the organization would therefore include all such considerations that are required for the expected benefits for the financial statement users. Through the application of latest accounting policy, the cost of entity for deter mining the effects related to retrospective applications can be easily determined. The draft is issued in lieu of the public interest and posted on the organizational websites.
Applying changes in the accounting policies:
- This includes that an organization is liable for changes in their accounting policy that results from the application of an IFRS as per the specific transitional provisions.
- Whenever an entity would make changes in their accounting policy as per the initial application of an IFRS. This should not include any particular transitional provisions that are to be applied voluntarily but all the changes should be applied in a retrospective manner.
Retrospective application in the accounting policy is possible as per Para 19(a) or (b), which makes the entity to adjust their opening balance of equity at the earliest most period and furthermore the other comparative amounts discloses each prior period that is presented as the new accounting policies has been applied. Though there are various limitations that are related to these practices. Whenever an organization applies this new policy in a retrospective manner, it becomes difficult to cumulative or period specific changes.
The fundamental principles of accounting professionalism
The other respondent is the Institute of Singapore Chartered Accountants. They responded to the exposure draft that applies to IFRS 9 financial statements in relation with the IFRS 4 insurance contracts. ISCA had made a clear cut views from their members on the exposure via public consultation. The ISCA committee related to Insurance that consists experienced technical and accounting professionals from the accounting firms. The initiative taken by IASB to acknowledge the consequences related to different effective dates for IFRS 9 and IFRS 4 phase II involves all such possibilities so that IFRS 9 will be deferred until IFRS Phase II becomes highly effective (Gimbar, Hansen & Ozlanski, 2016). Although there is a disadvantage of decreasing comparability related in the intervening period.
In the exposure draft, the clarification of material is defined while making minor amendments related to the IAS 1, presentation of financial statements and IAS 8 that is concerned with the accounting policies and all changes in the accounting errors and estimates. The proposed draft redefines the nature of material and clears it application to:
- Improve the idea related to the explanations that defines material.
- Incorporate existing supporting requirements within IAS 1 to all the definitions that allow them additional prominences.
- Align the materiality concept related to IFRS standards. Moreover improvements are to be made (Watson, 2015).
The Board proposes all such amendment related to IAS 8 and IAS 1 to align the materiality concept. The respondents are IFRS foundations and the major highlighted issued in the draft to IAS 8 are as follows:
Materiality of the data obtained is actually depended on the magnitude or the nature of the information or both. The organization should assess whether all such information’s are preset individually or in relation with the other information. The material information may be obscured in nature if it is not communicated clearly to the other parties.
Basis for conclusion:
The basis for conclusion actually summarizes all the considerations related to the International Accounting Standard Boards while proposing the amendments. The Board of the company was informed about the financial reporting disclosure through its feedback provided in the Exposure Draft Initiative (Apostolou et al., 2015). The entities also experience various difficulties to make materiality judgments while preparing for the financial statements. The feedback obtained from the respondents will help in making all such materiality judgments that are related to the generally behavior instead of relating to definitions of material.
The feedback that also indicates few auditors, entities and regulators considers the financial statements primarily as an important document. Few of the entities have made it quite easier to use this checklist approach by applying judgment due to the management resources constraints. Moreover, practicing a mechanical approach would make the judgment to be challenged by their regulators, auditors and users of the financial statements (Crawford et al., 2105). Moreover, entities prefer to be cautious while omitting crucial disclosures so that risks can be easily avoided by the parties. Although the board has received crucial response from their stakeholders, which highlights the existing definition of materiality. This approach would encourage the organizations to disclose their immaterial data in their existing financial statements.
In addition to this, the revised definition of materiality proposed in the Exposure draft slightly differs from the wordings that is used in IAS 8 accounting policies and changes in accounting errors and estimates and IAS 1 presentation of the financial Statements. The bard informs that the relevant substance related to the definition is still the same that covers the misstatement or omission of information. This furthermore influences all the decisions that are concerned with the users of financial statements. These refinement would make the definition has made the organization easier to understand. Moreover, it is not intended to alter the main concept of materiality that is underlined in the IFRS Standards.
Appendix
References:
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Apostolou, B., Dorminey, J. W., Hassell, J. M., & Rebele, J. E. (2015). Accounting education literature review (2013–2014). Journal of Accounting Education, 33(2), 69-127.
Baboukardos, D., & Rimmel, G. (2016). Value relevance of accounting information under an integrated reporting approach: A research note. Journal of Accounting and Public Policy, 35(4), 437-452.
Benson, K., Clarkson, P. M., Smith, T., & Tutticci, I. (2015). A review of accounting research in the Asia Pacific region. Australian Journal of Management, 40(1), 36-88.
Brown, P., Preiato, J., & Tarca, A. (2014). Measuring country differences in enforcement of accounting standards: An audit and enforcement proxy. Journal of Business Finance & Accounting, 41(1-2), 1-52.
Crawford, L., Ferguson, J., Helliar, C. V., & Power, D. M. (2014). Control over accounting standards within the European Union: the political controversy surrounding the adoption of IFRS 8. Critical Perspectives on Accounting, 25(4-5), 304-318.
De Colle, S., Henriques, A., & Sarasvathy, S. (2014). The paradox of corporate social responsibility standards. Journal of Business Ethics, 125(2), 177-191.
Dillard, J., & Vinnari, E. (2017). A case study of critique: Critical perspectives on critical accounting. Critical Perspectives on Accounting, 43, 88-109.
Gimbar, C., Hansen, B., & Ozlanski, M. E. (2016). The effects of critical audit matter paragraphs and accounting standard precision on auditor liability. The Accounting Review, 91(6), 1629-1646.
Goldstein, M. (2018). U.S. Accuses Accountants of Trying to Game Reviews of KPMG Audits. Retrieved from com/2018/01/22/business/kpmg-accountants-charged-audits.html?rref=collection%2Ftimestopic%2FAccounting%20and%20Accountants”>https://www.nytimes.com/2018/01/22/business/kpmg-accountants-charged-audits.html?rref=collection%2Ftimestopic%2FAccounting%20and%20Accountants
Harrison, J. S., & van der Laan Smith, J. (2015). Responsible accounting for stakeholders. Journal of Management Studies, 52(7), 935-960.
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Shafer, W. E. (2015). Ethical climate, social responsibility, and earnings management. Journal of Business Ethics, 126(1), 43-60.
Shubber, K. (2018). Former KPMG partners charged with fraud. [online] Ft.com. Available at: https://www.ft.com/content/7b5d70ee-ffa2-11e7-9650-9c0ad2d7c5b5 [Accessed 14 May 2018].
Thomson, I. (2015). ‘But does sustainability need capitalism or an integrated report’a commentary on ‘The International Integrated Reporting Council: A story of failure’by Flower, J. Critical Perspectives on Accounting, 27, 18-22.
Watson, L. (2015). Corporate social responsibility research in accounting. Journal of Accounting Literature, 34, 1-16.
West, A. (2018). After virtue and accounting ethics. Journal of Business Ethics, 148(1), 21-36.
Link for Comment Letter: https://isca.org.sg/media/777998/comment-letter-for-exposure-draft-applying-ifrs-9-financial-instruments.pdf
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