There has been an increasing trend for companies to apply a variety of ‘favourable’ rules to be followed when it comes to the preparation and presentation of financial statements in reporting today (Henderson, Peirson, Herbohn, Artiach & Howieson, 2014). Despite the fact that there are only two widely known accounting methods being applied by accounting professionals, that is accruals accounting and cash accounting, there is also a wide range of accounting policies that different companies usually apply differently when recognizing revenues and charging expenses. This means that international accounting standards bodies such as IFRS, IAS, GAAP and IASB do not deny firms the freedom of choosing between using an aggressive or a conservative accounting policy.
The freedom in the choice of an accounting policy also applies when a company is willing to make an additional voluntary disclosure such as sustainability reporting or not. In some industries, companies are usually required to make use of the same accounting policy while in others, uniformity in accounting policies used is not required. For instance, the choice of accounting policy for large and complex businesses such as mining companies is usually very important because there are a number of projects that require valuation and also the treatment of those projects that have been undertaken but the complete payments for them have not been received (Stadler & Nobes, 2014). Under an accruals accounting method, a company is not required to recognize any receivables before actually being earned. Under cash accounting method, the rules require that a company should earn revenue or incur expenses when money is received or paid.
Since it may not be practicable to make use of cash accounting or accruals accounting alone, many companies usually make use of both methods together so that there is recognition of only the percentage of revenues or expenses that have been incurred/ paid or earned/ received that corresponds to the proportion of the project being undertaken. By looking at the annual reports of Newcrest mining company, this paper investigates the kind of communication being conveyed by the company directors via voluntary disclosure and at the same time assessing the factors that might have led the company towards choosing the kind of accounting policies currently in use. Cases of creative accounting and the use of opportunistic behaviours in financial reporting is also reviewed.
Newcrest company is one of the largest gold mining companies in the world having a high value, quantity and quality of gold reserves, strong pipeline and operating mines. The company operating in the Asia Pacific region has its origin dating back to 1966 when it used to be a subsidiary of Newmont Mining Limited that was established in Australia. Its mission is to deliver high quality and superior quality returns to its shareholder’s through the exploration, development and excavation of gold and copper mines. Its vision is to be the minor of choice in the world by operating in a safe, efficient, responsible and profitable mining practice (https://www.adenergy.com.au/, 2018). In terms of business activities, Newcrest has five production geographic areas in Asia, Australia and the Pacific region with a strong pipeline of green fields and brown fields of exploration projects and gold reserves that can be mined up to 25 years’ times (“CRATER GOLD MINING: QUARTERLY ACTIVITIES REPORT For the period ended 31 March 2018 | 4-Traders”, 2018).
In terms of ability to generate cash flows, Newcrest is well placed and it has the capability of generating strong cash margins from the high-quality gold reserves assets it has over a longer term. As one of the unhedged gold producers in the world, Newcrest company has a sound balance sheet which is an indication of a strong operating cash flow coupled with a technical capability when it comes to exploration of organic growth opportunities that presents from time to time. Looking at the 2017 financial report of Newcrest company, the financial strength of the company in a layman’s language can be described as that that can enable the company to deliver competitive returns for its shareholders over a long period of time. However, some questions can be raised about the integrity of the figures since it is known that the company has not been recently operating as well when compared with some of its competitors (Smith & St., 2018). For instance, the gold production for Newcrest company in 2017 was 2381 thousands of ounces which are a drop of 2% from 2016 which was at 2439 thousands of ounces. When it comes to copper, the production in 2017 was 83 tons while in 2016 it was 83 tones. This is just a 1% increase. It is therefore questionable for the company to have reported a higher EBITDA of 1408 in 2017 from 1292 in 2016 (an increase of 9 %) and yet the production of the major mineral resources was a bit low (Newcrest 2017 Annual Report, 2017). Exhibit 1 shows a descriptive performance of the mineral production in 2016 and 2017.
Despite the fact that the financial reports of Newcrest company show how the firm is performing well, a closer look at the financial statement reports indicates that there might be some factors that lead the company’s management to choose ‘favourable’ accounting policies with a motive of indicating better financial performance than it should have been. The concept of choosing one accounting policy over another because of some hidden motives is known as creative accounting (Henderson, Peirson, Herbohn, Artiach & Howieson, 2014). From a number of researchers that have been conducted on well-performing companies in the world, the findings have shown that there are quite a number of companies that usually exploit all the loopholes that exist in accounting and financial reporting regulations so as to gain an advantage through those loopholes (“Creative Accounting, Fraud and International Accounting Scandals”, 2018). Creative accounting, therefore, compels a firm to present its financial statements with figures which are misleading or might not be true in the light of the true and fair value of the company (Kuepper, 2018). The manner in which Newcrest has valued its unexplored mineral resources is really questionable. Exhibits 2 and 3 shows the estimated assets overview for the company which are located in different geographical locations(Newcrest 2017 Annual Report, 2017).
In any well financially stable company such as Newcrest, there is usually some tendency for management to make use of some creativity in the way the books of accounts are prepared so that the financial performance of the company continues to be viewed as better than before. This practice of exploiting all the possible ways of alternative accounting recognition and disclosure usually comes up with a lot of bias (Ciesielski & Weirich, 2015). For instance, there is some possibility that Newcrest company might have overestimated the value of gold and copper reserves that are currently being mined so as to create a better financial view (Kuepper, 2018). The consequences of overestimation can be profound but because of the fundamental motives that are being eyed, the management and financial statement preparers usually ignore this for the sake of the following constraints.
Ways in Which Accountants Use Creativity Accounting in the Preparation and Presentation of Financial Statements
Despite the requirements by international and local standards that professional accountants should adhere to the laid down procedures of accounting, there are four ways in which accountants may be ‘creative’ in the process of preparation and presentation of financial statements. They may be:
Exploiting the discretion in accounting standards that do not prevent companies from choosing a ‘‘preferred” accounting policy or method to adapt and hence choosing the policy that is to the advantage of the company by giving a positive image which might not be the case.
Overestimation
This involves misusing the freedom that is given to a company when it comes to the estimation of certain groups of intangible assets such as goodwill and unexplored mineral resources thereby making entries that not only presents a false judgement about the firm but also gives a false future financial projection and prediction about the company. As for Newcrest company, the valuation for mineral resources and ore reserves might have been overestimated.
These are transactions that do not exist but are entered by the company so as to manipulate the income statement and balance sheet figures and therefore move ‘‘false’ ‘profits between different accounting periods (“What Are Some Creative Accounting Examples?”, 2018).
‘’Timely’’ Reporting.
This involves the timing of genuine transactions in such as way so that they can they can create a certain level of the desired impression about the accounts and financial statements of the company, which might not be created if the accounts are prepared at a later date.
The idea of using opportunistic behaviour by managers and financial statement preparers is on the rise today. Opportunistic behaviour involves choosing between alternative policies for measuring, recognizing and disclosing financial statements in such as way so as to maximize the benefits of the managers or the chief accountants of an organization at the expense of the shareholders and other stakeholders of the organization (Cornwell, Dorsey & Mehrzad, 1991).
As for Newcrest Mining company Limited, there is some use of opportunistic behaviour when it comes to the choice of the accounting policy that has been used in ascertaining the value of the mineral resources and ore reserves that have been reported in the annual report. Exhibit 4 shows the figures and the basis of valuation that company has used in estimating the value of the mineral resources and ore reserves owned by the company. Another example of the use of opportunistic behaviour by Newcrest Mining company is in the key achievements section on page 8 of the financial report (Newcrest 2017 Annual Report, 2017). At this section, the company has used the opportunity to present the positive sides of the firms’ performance only. The company states that it was able to achieve a low-cost production position and it was able to generate free cash flows of up to & 739 million and yet it does not tell us how the low-cost production or the free cash flows were going to impact on the company’s net profits. The details for the achievements sections are found on exhibit 5.
A number of researchers have found out that opportunistic behaviour in accounting that is prevalent among many firms today can be only be reduced through the use of the process of contracting. Contracting is one of the incentive measures of removing the conflicts of interests that exists when the same parties, for example, the accountant is involved with the tendering process as well as involved in paying for the same sum of the goods supplied (Glas, 2016). It is therefore prudent to institute project alliances in firms that require contractor organization to supply certain services and cooperatively help the company to realize the objectives of the project. Contracts between firms are therefore the central way of reducing opportunistic behaviour in accounting because contracts have a role of reducing many social moral hazards such as corruption, the supply of substandard quality products and even delivery of goods with the motive of inflating prices of goods and services supplied (Casas-Arce & Kittsteiner, 2016).
Newcrest has done a lot in trying to reduce the concept of opportunistic behaviour when it comes to the supply of the desired goods and services for the company. There is a Supply and Logistics department that deals with sourcing of projects and procurement of goods (https://www.adenergy.com.au/, 2018). The department is also tasked with ensuring that the company gets valued for all of the supply chain transactions that take in the company. The Supply and Logistics function also ensures that all the supplies and contracts formed with the company adhere to the company’s policy and Standards.
Conclusion
To sum up it is evident that there quite a number of current issues in accounting today. These issues range from creative accounting, favourable choice of a legal alternative accounting method and opportunistic behaviours in financial accounting. As discussed above, these issues are being practised through a number of ways including overestimation of accounting figures, ‘‘timely” reporting, artificial transactions and favourable choice of accounting policies. It is also worth noting that if these practices are used in excess without caution, they can eventually lead to distorted current and future financial performance of the company and hence giving the management a false impression that the company is performing well and yet that is not the case.
References
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Ciesielski, J., & Weirich, T. (2015). Current Accounting Issues Facing Chief Accounting and Chief Financial Officers. Journal Of Corporate Accounting & Finance, 26(5), 63-72. doi: 10.1002/jcaf.22065
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Cornwell, C., Dorsey, S., & Mehrzad, N. (1991). Opportunistic Behavior by Firms in Implicit Pension Contracts. The Journal Of Human Resources, 26(4), 704. doi: 10.2307/145981
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IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors. (2018). Retrieved from https://www.iasplus.com/en/standards/ias/ias8
Kuepper, J. (2018). Creative Accounting: When It’s Too Good to Be True. Retrieved from https://www.investopedia.com/articles/trading/10/creative-accounting-too-good.asp
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Stadler, C., & Nobes, C. (2014). The Influence of Country, Industry, and Topic Factors on IFRS Policy Choice. Abacus, 50(4), 386-421. doi: 10.1111/abac.12035
Smith, M., & St., S. (2018). Why Newcrest Mining Limited (ASX:NCM) May Not Be As Efficient As Its Industry. Retrieved from https://finance.yahoo.com/news/why-newcrest-mining-limited-asx-052707417.html
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