4-part Financial Accounting - Example

Commentary 1 – Financial Accounting Theory On August 21, 2009, the Oakland Tribune reported that officials of the San Mateo County in California, United States of America, were deliberating on the laying off of some sixty court workers due to state budget cutbacks. To the contrary, the top executive of the court apprised the employees that the deficit in the amount of 3.89 million dollars was due to internal accounting errors. (Shaun Bishop. Accounting errors could cost 60 San Mateo County court employees their jobs. insideBayArea The Oakland Tribune. August 21, 2009. [internet]) The court personnel staged a rally demanding for an independent audit of the accounting books and records and financial statements of the county in this connection. The Accounting Issue / The Relevant Events and Consequences The accounting issue here refers to the responsibility of the local government to inform the people of the affairs of the county owing to political and economic implications and under the principle of adequate disclosure. Such obligation has to be made more important because of the great resulting impact. (Generally Accepted Accounting Principles. CliffNotes The Fastest Way to Learn. [internet]) The afore-cited observations have to become part of the accounting sphere because of the deplorable anomaly and discrepancy between what the officers of the county were telling the public and what the high administrative echelon of the court was saying. Link to Recognized Authorities As mandated by generally accepted accounting principles, the requirement on disclosure is meant to allow the reader to be aware of the financial status of the person or entity. (Fess and Niswonger. [1986]). This same point is sanctioned by financial accounting theories. In the instant case, the officialdom of San Mateo is duty bound to fully inform its constituency in general and the court personnel in particular regarding its true financial condition. Agreeing and Disagreeing with the Issues in the Article Accounting is part of the information system of a natural or juridical person as far as concerning financial circumstances and money terms. The whole process starts with the recording of every transaction from the source documents. These records will then be classified under the proper accounts and posted in the general ledger from which to extract the trial balance and the financial statements. San Mateo County is expected to have adopted these standard procedures. The stand of this paper cannot agree with the notion that the county could not properly provide the required financial statements. Incidentally, if the data which are fed into the accounting books are erroneous or erroneously entered, the financial condition and the results of business operations of the natural person or juridical entity cannot be truly presented. Flawed financial statements can result in grave repercussions especially if the mistakes are significant. That seemed to be the case in San Mateo. On another note, this thesis agrees with the move of the court employees to demand for an independent audit of the relevant books and records and financial statements. References Fess, Phillip and C. Rollin Niswonger. (1986) Accounting Principles Volume 1. 2nd Philippine Edition. Cincinnati, Ohio. South-Western Publishing Co. pp. 359-363) Generally Accepted Accounting Principles. CliffNotes The Fastest Way to Learn. [internet] Accessed October 4, 2009. Available at: Shaun, Bishop. Accounting errors could cost 60 San Mateo County court employees their jobs. insideBayArea The Oakland Tribune. August 21, 2009. [internet] Accessed October 3, 2009. Available at: http://www.insidebayarea.com/sanmateocountytimes/localnews/ci_13179629 Commentary 2 – Accounting in Society and Environment The Australian Broadcasting Corporation website posted on September 4, 2009, the news headline about Ernst & Young offering a one hundred twenty five million dollars settlement in connection with the collapse of the Sons of Gwalia, a Western Australian mining company. The proposal is still subject to the approval of the creditors following a protracted court battle which has been pending for four years. While there can be no conclusion regarding professional misdeeds or negligence at this point, serious questions may be raised about the services of the biggest accounting firm in the world. Common sense dictates that he who extends a hand for a compromise is probably guilty. Again, however, no final resolution can be had out of this insinuation. As a matter of fact, the accountancy firm vigorously defended its actions and has maintained no liability up to the very end. (Ernst and Young offer $125m in Gwalia case. ABC News. [internet]. The Accounting Issue / The Relevant Events and Consequences An inquisitive process can go further. In 2002, at the height of the Enron debacle, Ernst & Young was accused by the Securities and Exchange Commission of the United States allegedly for violation of ethics rules. In the same year, the consultancy giant was likewise involved in federal investigations of companies being incorporated in overseas tax havens in order to get rid of taxes while the accounting firm amassed huge revenues. (Ernst & Young. OpenSecrets.Org. Center for Responsive Politics. [internet]) Recently, the Hong Kong offices of Ernst & Young were raided by the police amid accusations in court that it falsified documents to cover up imprudent acts which contributed to the corporate collapse of Akai Holdings. It is further reported that an out-of-court settlement in the hundreds of millions of Hong Kong dollars ended the lawsuit. (The Associated Press. Ernst & Young raided amid fraud probe in Hong Kong. 30 Sep 2009. CNBC First In Business Worldwide. [internet]) All these developments have become an accounting issue because of the apparent effect of ethical values to the accounting profession and its correlation to society and the environment. The thing speaks for itself. There are two multi-million dollar settlement offers, three very big corporations falling down, a police raid and a federal tax investigation. It is high time that order and decency are brought back to the accountancy profession lest the bad reputation it has suffered continues to be in shambles. Link to Recognized Authorities Socioeconomic accounting is about the impact of organizations on society. Institutions, including big accounting firms, affect the quality of life. Likewise, programs undertaken by governments are supposed to accomplish certain social goals. (Fess and Niswonger. [1986]) Worthy to note is the fact that the operation of Ernst & Young is global. Following the negative trends in its practice as narrated above, the conglomerated consultant appears to have become a financial mafia with a worldwide network. This can be an innuendo but the pattern suggests that Ernst & Young helps a client commit a crime, collects the loot, and pays for the crime out of the loot it has collected. Ironically and unfortunately, the firm’s clientele include several state agencies in American and other jurisdictions. (Ernst & Young. Wikipedia. [internet]) Agreeing and Disagreeing with the Issues in the Article The whole caboodle apparently exhibits a strong conflict of interest. And the people of the world, particularly those in the business communities, will have every reason to suspect and doubt the use of political and economic clout of the humongous financial advisor to serve its interests and those of the men behind. Ethical standards and prudence have to be put in place. Ernst & Young executives must undergo a self-reflection of what is appropriate. A collapsing corporation contributes to a collapsing government. Applying the domino effect syndrome, a collapsing government has its share in any resulting global economic mess. These misfortunes will encourage anarchy and pandemonium in magnified proportions if no corrective measures are taken before things shall have become too late. In the same manner, those running the affairs of governments have to do some re-thinking. The proponent of this thesis disagrees with the scheme of settlement being undertaken by Ernst & Young on a rampage because, in truth, these are presumed admissions of ethical infractions and cannot be tolerated. However, the writer of this paper is in agreement with the creditors going over the terms of the offered compromise and approving the same if everything is appropriate and above board. References Ernst and Young offer $125m in Gwalia case. ABC News. [internet] Accessed October 4, 2009. Available at: Ernst & Young. OpenSecrets.Org. Center for Responsive Politics. [internet] Accessed October 4, 2009. Available at: ) Ernst & Young. Wikipedia. [internet] Accessed October 6, 2009. Available at: < http://en.wikipedia.org/wiki/Ernst_&_Young> Fess, Phillip and C. Rollin Niswonger. (1986) Accounting Principles Volume 1. 2nd Philippine Edition. Cincinnati, Ohio. South-Western Publishing Co. p. 6) The Associated Press. Ernst & Young raided amid fraud probe in Hong Kong. 30 Sep 2009. [internet] Accessed October 4, 2009. Available at: ) Commentary 3 – Measurement Applications A new move by Apple in realizing profits for its iPhone sales, with the prospect of getting the approval of regulators, can become a hot topic for debate. iPhone sales are currently distributed over a period of twenty four months for the reason that free software updates are provided the buyers during the life or usability of the remote control gadget. This will most likely change according to a novel development reported in the Business Insider. (Blodget, Henry. iPhone Accounting Change Could Send Apple Profits And Stock To Moon (AAPL). Sep. 12, 2009. Silicon Alley Insider. THE BUSINESS INSIDER. [internet]) To be possibly approved by the Federal Accounting Standards Advisory Board (FASAB), profits will immediately be recorded for every sale realized. The Accounting Issue / The Relevant Events and Consequences The cited innovation will make Apple stocks attractive as earnings per share will skyrocket. Interestingly, the modification is seemingly not in accordance with the matching and conservatism principles of accounting. Necessarily, the software features will still have to be provided by the company during the two-year period in order to satisfy the buying consumers. However, the additional cost of providing these perks is not to be recognized at the time of sale. An illustration may be useful. X Company sells a car to A for 10,000 dollars in 2009 with a promise to put an additional sound system accessory to the vehicle by the middle of 2010 amounting to, say, 2,000 dollars. X Company immediately records the 10,000 dollars as part of its sales for 2009. On the other hand, it will enter into the books the 2,000 dollars expense for the additional sound system complement only by June or July of 2010 upon installation. There is no matching here. Likewise, there is no conservatism because a higher profit is immediately presumed. Link to Recognized Authorities Accounting procedures and value judgments affect financial statements presentation. History has shown that accountants have embraced conservatism, a method which embraces lesser net income or asset value. (Fess and Niswonger. [1986]) It is basic in accounting practice that where there is more than one option in reporting, conservatism gives the accountant the duty to choose whatever will show the least earnings. (Explanation of the Topic…Accounting Principles. AccountingCoach.com. [internet]) Agreeing and Disagreeing with the Issues in the Article In the latest Apple plan, matching and conservatism practices will have no place. It is as if to say that the accrual basis is going and the old pure cash basis is coming back and that businesses will always be optimistic in the reckoning of profits. While times change especially because of high technological advancements, there seem to be no ready arguments yet to persuade all and sundry to change the rules in accounting. It is imperative to disagree with the proposal to recognize the questioned sale outright in the first year as contrary to the matching and conservatism principles while it is appropriate to agree with the Financial Accounting Standards Advisory Board to consider the change on the condition that sufficient consensus is gathered from a broad spectrum of the accounting profession via public hearings and other medium of consultation. Referemces Blodget, Henry. iPhone Accounting Change Could Send Apple Profits And Stock To Moon (AAPL). Sep. 12, 2009. Silicon Alley Insider. THE BUSINESS INSIDER. [internet] Accessed October 24, 2009. Available at: Explanation of the Topic…Accounting Principles. AccountingCoach.com. [internet] Accessed October 4, 2009. Available at: Fess, Phillip and C. Rollin Niswonger. (1986) Accounting Principles Volume 1. 2nd Philippine Edition. Cincinnati, Ohio. South-Western Publishing Co. p. 364 ) Commentary 4 – Decision Usefulness to Financial Reporting One Nitish Grover, an International Associate of the American Institute of Certified Public Accountants and a Fellow of the Institute of Chartered Accountants, writes in the Gerson Lehrman Group website about Business Cycles, Legislation and Accounting – Where will it Lead? (sic) under date of September 15, 2009. The piece summarizes that the current recession is part of a business cycle and that the reasons for the economic disaster are several including those which President Barack Obama attributes to investment bankers and executives. The summary also mentions pending legislations to limit or avoid repeats and poses the query of the impact of these looming statutes to accounting and to figures on which financial decisions are made. The author enumerates what should be analyzed and the list includes overhauling economic, tax and accounting regulation. It also makes mention of accounting standards and proposes that what is relevant is a continuing set of accounting principles which must go hand in hand with prevailing economic circumstances. (Nitish Grover. Business Cycles, Legislation and Accounting - Where will it Lead? September 15, 2009. Accounting and Financial Analysis. Gerson Lehrman Group. [internet]) The Accounting Issue / The Relevant Events and Consequences The perceptions of the accountant writer may be greatly appreciated. Nonetheless, it is objectively opined that a careful evaluation and assessment of things will lead everyone to go back to the old traditional and time-honoured principles of accounting as still evidently the best options for accountants to apply. The problem does not lie in these principles but in the people who do not religiously follow or observe the guidelines in the application of these principles. Recent economic and financial fiascos were implied have been caused by accountants in a large part. The Enron scandal indicated accountants conniving with corporate executives in concealing the whole truth of the company’s financial condition. Resultant of that, the Sarbanes-Oxley law was enacted in the United States supposedly to define the accountabilities of managers and accountants. There is actually no need for that statute because the full disclosure principle has been there for so long a time. Link to Recognized Authorities The fundamental procedure of financial statements reporting is simple. It is merely the matter of recording, classifying and summarizing of daily transactions. (Fess and Niswonger. [1986]) Whatever is more complex will sow confusion instead of better understanding. In accounting, anything that is outside of the ordinary will no longer realistically exhibit the results of the business cycle. Agreeing and Disagreeing with the Issues in the Article It has to be observed that even the housing mortgage disaster and the general credit damage in the US are insignias of irresponsibility on the part of unscrupulous accountants making such irregularities like window dressing, that is, making appear as good what is ugly, precisely in violation of the disclosure policy of financial accounting theory. Had it been otherwise, loan institutions catering to those housing credits could have decided better and, a vicious cycle that it was, the bridging banks could have properly dissected the loans portfolio of the lending intermediaries. It was a case of errors correcting previous errors until all started failing and going down. The separate entity principle has been there also for so many years. And yet accountants must have negligently failed to advise their clients accordingly. The Madoff scam is a classic example. Bernard Madoff was no financial wizard. He was a fraud. Both rich celebrities and wealthy individuals were victimized by the illegal scheme. (The Associated Press. Larry King, Sandy Koufax named among Madoff scam victims. The Jewish World. HAARETZ.com. [internet]) Why? It is presumed that they were impressed by the flamboyant lifestyle and the paraded assets of Madoff. What is the point? Those preys were not correctly counselled by their accountants to go deeper. Madoff was the man. His businesses were separate from him. That simply was the case. The person may look fine but the enterprise and the venture behind him rot. Upon these scores, it is difficult to agree outright about overhauling accounting methodologies. Instead, it is better to agree on implementing the current rules with teeth under the rule of law in all jurisdictions in the global landscape. With that, investors might be safeguarded anew. In sum, there really is no need for a quick demand to change the rules. It is more a matter of changing attitudes, moral values and behaviours and to strictly sanction those who drift. An eleventh commandment is unnecessary. Just follow the ten and punish those who disobey. References Fess, Phillip and C. Rollin Niswonger. (1986) Accounting Principles Volume 1. 2nd Philippine Edition. Cincinnati, Ohio. South-Western Publishing Co. p. 35. Nitish Grover. Business Cycles, Legislation and Accounting - Where will it Lead? September 15, 2009. Accounting and Financial Analysis. Gerson Lehrman Group. [internet] Accessed October 24. 2009. Available at: The Associated Press. Larry King, Sandy Koufax named among Madoff scam victims. The Jewish World. HAARETZ.com. [internet] Accessed October 4, 2009. Available at: Commentary 5 - Standard Settings The Financial Accounting Foundation issued a news release dated September 22, 2009 expressing support for the Statement of Principles for Accounting Standards and Standard Setting being initiated by the International Accounting Standards Committee Foundation Monitoring Board. The report mentions about investor protection and confidence as the primordial consideration of the undertaking. (Financial Accounting Foundation Endorses Statement of the International Accounting Standards Committee Foundation Monitoring Board. NEWS RELEASE 09/22/09. FAF Financial Accounting Foundation. [internet].) The Accounting Issue / The Relevant Events and Consequences The cited writing likewise makes observation that investors trust the quality and integrity of accounting standards on the basis of whether or not the one setting those standards is transparent and independent. These are nice words. Sad to say, the same do not convey a concrete solution that can be relied upon. Link to Recognized Authorities Accounting is the language of business and must be used as a medium to convey the financial positions and results of operations of individuals, businesses, governments and other enterprises or entities. (Fess and Niswonger. [1986]) That is the basic rule. While accounting has to adapt to changes and new challenges, any modification has to be viewed with great care and vigilance. Agreeing and Disagreeing with the Issues in the Article It is worthy to note that the above-mentioned monitoring board does not have any power of sanctions. It cannot penalize a corporation and its officers for not using those standards in financial statements presentation. No way can it do the policing in this aspect. Within this framework, there is sound disposition in disagreeing with the proposal to revisit the subject standards setting. What is more important is to execute the current policies which are already complete with inherent safeguards. To further emphasize, the reality is that the prospective investor who plans to buy some shares in a corporation is totally at his own risk. There is actually no solid decision-making basis for one who intends to purchase stocks and become a corporate stockholder. It will just be a total gamble. From Enron to Lehman Brothers to several big banks to Madoff’s financial institutions, people have become sceptical of corporate executives abusing their powers at the expense of the stockholders. For as long as greed and dishonesty are perceived by the public to be in the human elements of company officers and conniving accountants, the trust level will remain very low, nil or zero. As early as in July, 2002, then US President George W. Bush tried to call for stiff criminal penalties against those who misreport corporate earnings. One congressman commented that if one such corporate figure is prosecuted and jailed, investor confidence would gradually return. (Wallace, Kelly. Bush to get tough on corporate abuse. July 7, 2002. CNN.com./insidepolitics. [internet]) That is easier said than done. As of April of this year, only eighteen per cent of Americans trusted their banks. (Jacobe, Dennis. Americans’ Confidence in Banks Hits New Low. April 23, 2009. GALLUP. [internet]) Unfortunately, in almost all those financial catastrophes, accounting had always had a hand. In the 2002 Worldcom disaster, for instance, its accounting department understated certain costs and made these appear as assets on the balance sheet to make it look financially healthy. (Jonesington, Jones. WorldCom Scandal: A Look Back at One of the Biggest Corporate Scandals in U.S. History. March 08, 2007. BUSINESS & FINANCE. AC ASSOCIATED CONTENT. [internet]) The theory though is to agree that, yes, confidence will come back one day. Very slowly, it will do so. References Fess, Phillip and C. Rollin Niswonger. (1986) Accounting Principles Volume 1. 2nd Philippine Edition. Cincinnati, Ohio. South-Western Publishing Co. p. 7) Financial Accounting Foundation Endorses Statement of the International Accounting Standards Committee Foundation Monitoring Board. NEWS RELEASE 09/22/09. FAF Financial Accounting Foundation. [internet] Accessed October 4, 2009. Available at: Jacobe, Dennis. Americans’ Confidence in Banks Hits New Low. April 23, 2009. GALLUP. [internet] Accessed October 4, 2009. Available at: ) Jonesington, Jones. WorldCom Scandal: A Look Back at One of the Biggest Corporate Scandals in U.S. History. March 08, 2007. BUSINESS & FINANCE. AC ASSOCIATED CONTENT. [internet] Accessed October 4, 2009. Available at: ) Wallace, Kelly. Bush to get tough on corporate abuse. July 7, 2002. CNN.com./insidepolitics. [internet] Accessed October 4, 2009. Available at: < http://edition.cnn.com/2002/ALLPOLITICS/07/07/bush.corporate.abuse/index.html> Commentary 6 - Information Approaches Dallas has a humble society for its Certified Public Accountants. Its monthly newsletter, VISIONS, says simple and ordinary things in its latest issue: ethics course, tax guide, volunteerism for love for kids, scholarship news, leadership nomination, etc. These things manifestly indicate good values. Accountants should go along this direction which equates with simple needs and honest means. Even the picture of its president, a certain Mitch Perry, does not show any flashiness. (VISIONS. The Monthly Newsletter of the Dallas CPA Society. Thursday, October 1, 2009. [internet]). Here, the ordinary approach in giving out information about regular professional activities is distinguished. The Accounting Issue / The Relevant Events and Consequences Upon the other hand, the kinds of money that change hands in the monstrous corporate scandals involving big-time accountants demonstrate life in the high society. Fundamentally, simple needs will normally lead to a decent and honest life. This commentary has nothing to do with accounting principles, policies and practices. It has to be stressed though that once core desirable values go loose among accountants, the very essence of public service will vanish in professional engagements. Greed will set in and greed always accompanies dishonesty. Link to Recognized Authorities Business decisions cannot be sound unless based on information which can be relied upon. It is upon this score that accounting and accountants have an important role in the economic and social system. ((Fess and Niswonger. [1986]) Accordingly, accountants are required to be substantially knowledgeable of the socioeconomic environment. This requisite characteristic necessarily includes good reputation regarding wholesome career practices. Agreeing and Disagreeing with the Issues in the Article It is interesting to observe at this juncture that the profile of Arthur Andersen, the founder of the giant accounting firm, strongly portrays good and admirable conduct in his exercise of the profession. He passionately supported high career standards in the accounting field. He was also known to be very honest to the extent of refusing irregular offers even if he would lose clients. He was a hard worker. (Arthur Andersen. Norwegian American Accountant. [internet]. Indeed, people and the quality of their characters are what make or un-make this world. Along such line, this thesis poignantly proposes to agree with the sound practices of the humble Dallas group of Certified Public Accountants as appearing in the cited article and to disagree with those who deviate from the prudence of Arthur Andersen, a leading figure in the world of accountancy. References ANDERSEN, THE COMPANY, FALTERS; ANDERSEN, THE MAN, DIDN’T. Arthur Andersen. Norwegian American Accountant. [internet] Accessed October 4, 2009. Available at: Fess, Phillip and C. Rollin Niswonger. (1986) Accounting Principles Volume 1. 2nd Philippine Edition. Cincinnati, Ohio. South-Western Publishing Co. pp. 7-8) VISIONS. The Monthly Newsletter of the Dallas CPA Society. Thursday, October 1, 2009. [internet] Accessed October 4, 2009. Available at: . Read More