Accounting theory in Australia - Essay Example

CO3013 Accounting Theory Reflective Essay My reflection is based upon Watt and Zimmerman's contention that the managers of a firm will attempt to utilise methodologies to avoid taxes and dividends.In this vein I was have thoroughly preoccupied reflecting upon and reading on the Enron disaster and how numbers can not be seen as neutral and unbiased.Taking this course changed my perceptions about the very pith and substance of how I would ever perceive numbers.After taking this course I realised that numbers like words and conduct and can be just as easily manipulated by the human mind.Therefore they will be seldom neutral and unbiased.One of the most revealing moments were when I was able to see that even share valuation will be subject to novel accounting methodologies.For example I was able to see that in valuation of shares there would likely be an involvement of a lot of paper work in accounting terms in order to adjust the Capital Gains Tax (CGT) valuations for rebasing and indexation purposes ,assess Inheritance Tax (IHT) on shares and also assess the situation now with employee share schemes.It was seen that there might be a biased view of accounting when the share valuation will have to account for Goodwill valuations for partnerships and sole traders Group reorganisations and restructurings Stamp duty Employee Benefit Trusts Enterprise Management Incentive Schemes It was seen many times that by choosing certain accounting techniques it would be possible to see a certain bias emerging.For example while using the Asset based approach it was seen to ignore factors like Industry prospects ,Management quality / stability ,Growth potential ,Competitive bidding and the alternative opportunities for the company being valued for tax purposed to avoid paying large amounts of tax money to the Inland Revenue .Infact it was possible to see a conflict of views here where as many times what seemed like creative accounting reminded me of biased accounting .It was learnt that the process of attempting to bias accounts is often referred to as 'creative accounting'. which often attacked for not being neutral and ethical as some techniques can cause bias: 1. Revenue may be recorded too early. In particular revenue from sales may be recorded in the accounts before the sale is agreed. 2. Bogus revenues may be recorded. For example refunds from suppliers might be recorded as revenues. 3. Profits from recurring business may be artificially boosted by the inclusion of one-off gains. Also losses from recurring business might be described as non-recurring. 4. Current expenses could be allocated to a later period. This could take the form of depreciating or amortizing too slowly. 5. Future expenses may be shifted to a current period. For example depreciation or amortization may be too rapid. 6. There may be a failure to record all liabilities. 7. Current income may be allocated to a later period. 8. Unrealistic valuations might be given to inventories. 9. Unrealistic bad debt provisions could be made. 10. Items may be held 'off-balance sheet'. Infact it is worth mentioning the hazards of careless accounting as learnt from the Enron Saga. For the purposes of accounting practices the most important thing to analyse is that who exactly in the accountancy/auditing profession should have taken responsibility for the shortcomings in the accounting records .These accountants were clearly abusing their authorities as watchdogs for shoddy practices and instead they perpetrated fraud on the investors.. The Statement of Accounting Standards 100 clearly allocates responsibility to auditors in the matter of financial statements 'the responsibility for the preparation of the financial statements is that of the directors of the entity'. In this vein I learnt that accounting is a profession requiring much responsibility.The should be able to scrutinise and guard any financial wrong doing on behalf of the directors with regard to Auditing and Accounting Standards. It is evident from the events leading up to Enron disaster that the auditors and accountants were responsible for providing shareholders with 'reasonable assurance' that the published statements would present a true and fair view of the company's financial position.In the case of Enron not only was there evidence of malpractice with in the accounts,the destruction of these accounts was a criminal offence in itself..This was in breach of his obligations under the SAS 600 and even though this accountant/auditor tried to say in his defence that the information was provided by Enron itself to make its stock attractive to unsuspecting investors. The Enron saga has provided some interesting accounting dilemma's to the world of numbers which are assumed to be biased and neutral. All this time Enron was able to carry out such transactions unnoticed because of the fact that the accounting standards had not taken into account the new techniques in off-balance sheet financing. In accounting terms it meant that the off-balance sheet items were been used to keep liabilities of its books and by passed the US GAAP accounting standards. Also apparent from the above facts is that Enron has did some shoddy tax practices by recording revenues early and expenses were then shown in a delayed manner and this way it by passed the GAAP standard of timely recognition of assets and liabilities. Of much accounting interest is the fact that it used certain techniques of "illegal recognition of revenue". For example the holding of open books until certain sale targets were reached. They cleverly bypassed the rules under SAB 1010 as well by recording revenue and shipping merchandise to private warehouses for storage before their sales were final and later on they counted the shipments as sales. In this vein it is possible to see that accounting is not just about numbers.It is about human attitudes and behaviours and very vulnerable to fraud and manipulation as I was able to learn through out my course. References 1. Accounting For Enron: Shareholder Value And Stakeholder Interests ,Thomas Clarke,Corporate Governance: An International Review, Volume 13, Issue 5, Page 598-612, Sep 2005, Doi: 10.1111/J.1467-8683.2005.00454.X 2. Regulation Of UK Corporate Governance: Lessons From Accounting, Audit And Financial Services ,Ian P. Dewing1 And Peter O. Russell,Corporate Governance: An International Review, Volume 12, Issue 1, Page 107-115, Jan 2004, Doi: 10.1111/J.1467-8683.2004.00347.X 3. Evading Enron: Taking Principles Too Seriously In Accounting Regulation David Kershaw,Modern Law Review, Volume 68, Issue 4, Page 594-625, Jul 2005, Doi: 10.1111/J.1468-2230.2005.00552.X 4. Enron/Andersen: Crisis In U.S. Accounting And Lessons For Government ,Richard E. Brown,Public Budgeting & Finance, Volume 25, Issue 3, Page 20-32, Sep 2005, Doi: 10.1111/J.1540-5850.2005.00365. 87, Issue 2, Page 395-410, Jun 2006, Doi: 10.1111/J.1540-6237.2006.00387.X 5. Hematite, P.; Mitchell, C., "Section 461 Share Buy-outs: Principles of Valuation" (2003) 14 KCLJ 199 6. Gregory & Hicks, "Valuation of Shares: A Legal and Accounting Conundrum" [1995] JBL 56 7. C. Richard Baker, Department Of Accounting & Finance, Investigating Enron As A Public Private Partnership University Of Massachusetts Dartmouth, North Dartmouth, Massachusetts, USA 8. George J. Benston, And Al L. Hartgraves ,Enron: What Happened And What We Can Learn From It ,Goizueta Business School, Emory University, 1300 Clifton Road, Atlanta, GA 30322-2710, USA . Read More