Creative accounting is a growing issue of concern in the UK, threatening the credibility of both accounting and auditing auctions. The truth and fair view principal, which suggest that enterprises should give a truth and fair image of their operations, is now tolerated in favor of unethical practices. While a variety of definitions of the term creating accounting have been suggested, in this essay of mine I will use the definition suggested by Jones saying that creative accounting arises from the flexibility in accounting within the regulatory framework to manage the measurement and presentation of the accounts so that they give primacy to the interests of the preparers not the users (Jones, 2011, p.5). The aim of this essay is to discuss which factor influences creative accounting and which ones constrain it. Last and most important, which factors can help to constrain it regulate it, in order to prevent such actions. There are several reasons behind creating accounting that motivate managers to proceed in manipulation of figures, the two most important are related with stakeholders contracts and performance indicators. Most often managers pursue financial engineering by manipulating specific ratios such us EPS and gearing ratio. Regularly those ratios are linked with debt covenants and remuneration schemes, which have direct influence to manager’s behavior because their personal interests are conflicted. Bonuses depend by whether budgets and profit provisions are met, so managers manipulate financial outcomes to get the desired outcome they need to get their bonuses. Continuously, when debt covenants exist which are restrictions of borrowing may result in setting specific criteria such the level of sales or the level of prof... ... middle of paper ... ...ls. A company itself it should pay attention in how a corporation is governed, shareholders must choose directors which are independent from the firm to overview the activities of the managers. Managers can be easily compromised when personal interests are inflicted. The most procuratorial way, an investor can examine a firms performance is by financial reporting, which should not give wrong information and misleading results to shareholders. It is important because this will determine whether the investor will go forward to this transaction. In that range, auditors and analysts are responsible to publish true and fair information of the financial position of the firm. Managements should develop an ethical philosophy in their companies showing which the piles of the company are, where it stands and which the future goals they have are.
Ethics plays a vital role in developing accurate and high quality financial statements for management, financial institutions, and investors. As management utilizes financial statements to make decisions regarding the operations of the business, it is necessary to review accurate financial statements to make strategic decisions about the future of the organization. Investors and financial institutions require accurate financial statements to make informed decisions upon whether to invest funds into the organization or the wisdom of lending funds to said organization.
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
Olusegun Wallace, R. 1996. The Development of Accounting Research in the UK. In: Cooke, T. and Nobes, C. eds. 1997. The Development of Accounting in an International Context. London: Routledge, pp. 218-254.
... tempted to falsely inflate earnings is to take away their personal gains, if the company's stocks go up. I believe that when upper level management has too much incentive based on personal financial gain, which is directly based on the performance of the company; it compromises their judgments. I think that upper level management should not be allowed to receive stock options or to even own stock in the company as the financial statements would provide a neutral, bias-free report. Management would have no reason to "cook the books." I also feel that any management who still decides to falsify documents needs to be held more accountable for their actions and receive tougher punishments. I think that these strict guidelines would help the people in the United States and people all over the world feel more confident in investing their money into the stock market.
Management/Preparers of financial statements may have a number of factors that motivate them to manage earnings aggressively. The ultimate motive for earnings management, however, is to aesthetically enhance the performance of a company in the eyes of its stakeholders (Essays, UK,
Management accounting in organisation is very important for decision-making and to make the business more efficient and therefore increasing its profits. Is the process of preparing accounts that can help managers to make day-to-day and short-term decisions, by providing them with accurate and timely key financial and statistical information...
Corporate governance implies governing a company/organization by a set of rules, principles, systems and processes. It guides the company about how to achieve its vision in a way that benefits the company and provides long-term benefits to its stakeholders. In the corporate business context, stake-holders comprise board of directors, management, employees and with the rising awareness about Corporate Social Responsibility; it includes shareholders and society as well. The principles which...
According to the Generally Accepted Accounting Principles, T-Shirts by Tommy can account for the accident is to record an extraordinary item. Using the definition from our Intermediate Accounting textbook, extraordinary events are defined as, " events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence" (Keiso). Because of the nature of the plane crash, and the fact that these types of accidents happen very rarely, it can definitely be categorized as extraordinary. Tommy needs to estimate how much to expense for the loss of the building and other losses associated with the crash. Then he must record this item on his yearly income statement.
In the corporate form of business, the primary goal should be to maximize long-term value and owners’ value, or shareholder wealth maximization (Brigham, & Houston, 2011). The problem is that managers, who are supposed to make the decisions that would best serve the corporation, are naturally motivated by self-interest, and the managers’ own best interests may differ from the principal's or stakeholders best interests. An agency problem that exits in the corporate form of business is the conflict of interest between the company's management, and the company's stockholders. The relationship between the stockholders and corporate management is often based upon those conflicting interests that arise from a separation of ownership and control, differing management and stockholder objectives, and an information asymmetry that exists between the two groups (Fama & Jensen, 1983).
Financial and Managerial accounting are used for making sound financial decisions about an organization. They provide information of past quantitative financial activities and are useful in making future economic decisions. (Albrecht, Stice, Stice, & Skousen, 2002) The same financial data is used to derive reports for each accounting process yet they differ in some ways. Financial accounting primarily provides external reports for external users such as stock holders, creditors, regulating authority and others. (Garrison, Noreen, & Brewer, 2010) On the other hand Managerial accounting is concern with providing information that deals with the internal viability of the organization and is tailored to meet the needs of an individual organization. (Albrecht, Stice, Stice, & Skousen, 2002)
With over twenty years of work experience I have witnessed managers at all levels utilize various tricks to manipulate short-term quarterly earnings. It seems like most managers have different views on what is ethical and unethical when it comes to managing short-term earnings and tend to use questionable practices to meet company numbers. This has been confirmed from The Dangerous Morality of Managing Earnings case study as according to Gibson the accounting practice of offering a fourth quarter sales incentive and allowing customers 120 days to pay in an attempt to increase fourth quarter sales numbers was posed to the managers in the case study and returned results indicating that the practice was viewed as ethical, questionable, and even unethical (1990/2013). Without a unanimous response for this practice it is confirmed that each manager views this practice differently and with so many ways for financial numbers to be manipulated it would be difficult at times to get an accurate picture of a company’s current financial well being.
A consequences of focusing on organization or company’s stakeholder is that the shareholder value itself can be enhanced and improved when a wider stakeholder group-such as employees, provider or credit, customers, suppliers government and the local community is taken into account (Mallin, 2011). This theory also related to the organization management and business ethics that uphold moral and values in managing a company as it will covers the benefits to the society and other external parties as a whole rather than just for the internal parties.
Reichelstein, S. (2000). Providing Managerial Incentives: Cash Flows versus Accrual Accounting. Journal of Accounting Research, 38(2), 243.
Companies enjoys the freedom to choose its accounting policy that gives their preferred image is as per the accounting rules provided for companies to choose between different accounting methods. In fact deceptions are all in perfectly good taste. This is legitimate instance of creative accounting.
Dowd (2016) runs above and beyond with the clarification to state accounting fraud incorporates the change of accounting records in regards to sales, incomes, costs and different components for a profit motive, for example, boosting organization stock prices, getting ideal financing or maintaining a strategic distance from obligation commitments. Dowd is of the feeling that covetousness, absence of straightforwardness, poor administration data and poor accounting interior controls are a couple of explanations behind accounting fraud. (Dowd,