Discuss about the Catalyst for Managerial Decisions Reducing.
This study is based on the case study of Cocoa Ltd, which is department store. As per the case study, the company has performed well in the 2015 and expects to maintain the good performance rate in the next two years. However, as the economists have forecasted that during 2018 and 2019, the financial performance of the company will go down, the General Manager of the company asked the accountant Andrea to transfer some portions of the profits of 2016 and 2017 to the profits of 2018 and 2019. However, in order to manage the situation, the accountant decided to change the depreciation method without disclosing it in the financial statements. This situation has created ethical dilemma in the mind of the accountant. This study aims to help the accountant at Cocoa Ltd identifying proper solution so that the situation can be handled in a better way. The suggestions in the study will be given by considering AASB 116.
As per the case study, the General Manager at Cocoa Ltd wants to make a balance between the profit levels of 2016, 2017, 2018 and 2019. The primary motive of the General Manager is to keep the shareholders happy over the years. However, the step that the General Manager of the company has asked the accountant to do is not justified because transferring the profit of one year to the profit of another year is not ethical and it indicates falsification of the financial position of the company. At the same time, the accountant Andrea does not want to lose the job and changed the depreciation method to make the General Manager happy. However, Andrea has not mentioned the same in the financial statements, which is unethical and illegal according to AASB and other accounting standards.
In the case study, it has been identified that the accountant of the organization has changed the straight-line depreciation method to the sum of the years’ digits depreciation method. Panditharathna (2016) has stated that the sum of the years’ digits depreciation method is a better depreciation method than the straight line method. On the contrary, McConnell and Qi (2016) noted that in the sum of the years’ digits depreciation method, the profit of the organization is reduced artificially, which indicates the wrong disclosure of the financial position of the company. Moreover, the sum of the years’ digits depreciation method is not approved by AASB 116. As per AASB 116, the companies must identify the depreciation value by using the following formula:
The sum of the years’ digits method of depreciation does not follow this formula. Therefore, it can be said that the accountant of Cocoa Ltd has not followed the AASB 116 properly. As the accountant has not mentioned anything about the changed method of depreciation in the notes of the financial statements, it can be said that the company has not followed the full disclosure rule mentioned by AASB (Yilmaz and Buyuklu 2016). Not disclosing the important information like, depreciation method to the stakeholders of the company indicates the unethical behavior. Though the accountant is aware of the unjustified accounting treatment, she wants to save her job and that has creased ethical dilemma. In order to save the job, the accountant has taken such an accounting step, which denotes that the company is not operating its financial activities ethically (McCahery, Sautner and Starks 2016).
The unethical accounting step taken by the accountant of Cocoa Ltd can affect the interests of the shareholders of the company. As the company decided to reduce the profit level artificially by using the sum of the years’ digits method and the change in the depreciation method will not be disclosed the financial statements, the shareholders will be unaware of the actual financial position of the company (Kumar and Zattoni 2016). The shareholders will not be informed about the decreased financial strength of the company. This can lead the shareholders taking wrong decision regarding their investment in the company. This can create several big problems in the coming future (Ararat, Black and Yurtoglu 2016). If in future the shareholders get to know about the actual financial position of the company, then they will not be able to trust the company further. The company will lose huge number of investments as well as shareholders (Molla et al. 2016).
The given case study situation is indicating that the corporate governance at Cocoa Ltd is not so strong that can handle the weak situation within the company. Chell et al. (2016) suggested that the corporate governance of a company must be strong and logical enough so that the management does not face any difficulties while handling any critical situation. The changed depreciation method and not disclosure of that in the financial statements clearly indicate that the corporate governance of Cocoa Ltd has not followed the rules and regulations under AASB (Chan et al. 2016). The changed depreciation method denotes that the properties, plant and equipments of the company have not been depreciated as per the regulation under AASB 116 (Aasb.gov.au 2017). This means the corporate governance of the company includes unjustified accounting policies.
According to Weiss (2016), corporate governance is the back bone of a company. The success of a company depends on the appropriateness of the corporate governance policies of it. In support of this, Kelly et al. (2016) mentioned that if the corporate governance of a company is weak, then the risks of the company increase. Weak corporate governance creates unhealthy working culture within the company. Apart from that, the weak corporate governance may lead the company towards the huge loss and it may lead the company toward the business closure. In the words of Paull (2016), the weak corporate governance increases the internal complexity within the business and it may weaken the relationship between the management and the other stakeholders of the company.
Wong, Wong and Jeter (2016) believed that the companies, which are operating their business in the market of Australia are bound to develop their corporate governance policies in accordance to the Australian Accounting Standard Board or AASB. However, if the particular case of Cocoa Ltd is considered then it can be said that the corporate governance policies of the company has ignored AASB. The company not only ignored the depreciation method suggested by AASB 116, but it has also ignored the full disclosure regulation, which is mandatory for every company.
In the given situation, it can be found out that Andrea, who is the accountant at Cocoa Ltd, is in ethical dilemma regarding the accounting treatment in the company. In one hand, Andrea is aware of the unjustified order given by the General Manager of the company and on the other hand, the job is important to Andrea. In this type of situation, it is very difficult to take a decision that can meet the interests of General Manager of the company and can maintain the accounting rules and regulations (Steenkamp and Steenkamp 2016).
In order to improve the financial situation of Cocoa Ltd, the best strategy is to concentrate on the revenue earning capacity of the company. In the case study, it has been identified that the economists have forecasted that during 2018 and 2019, the financial performance of the company will decline. In order to manage that situation, the General Manager has asked Andrea to transfer the profit of 2016 and 2017 to 2018 and 2019. However, these types of steps are unethical. Therefore, the management or the accountant of the company must try to make the current financial condition strong enough so that it can survive during the bad phase (Ararat, Black and Yurtoglu 2016). The accountant that is Andrea can propose the following strategies to the General Manager for the better handling of situation:
Andrea can propose the sweep accounts strategy to the General Manager of the company. In this strategy, the company can sweep its extra funds to the interests-bearing accounts and can earn the money in terms of interests on those accounts. This step or accounting treatment is not illegal; rather it is very much applicable to the current situation at Cocoa Ltd (Yilmaz and Buyuklu 2016). In the case study, it can be identified that currently Cocoa Ltd is earning good amount of profit, which means the company has excess funds. Therefore, the company can easily transfer or sweep those funds and can create a source of income for the coming financial years.
The accountant can also suggest the General Manager to implement strong cost accounting system so that the total costs of the company can be controlled. In order to control the total cost, Andrea can suggest the General Manager to implement the ABC or Activity Based Costing method. If this particular costing method is implemented, then the accountant can identify in which activity the cost is high and can necessary steps to control that cost (McCahery, Sautner and Starks 2016). If the costs of the company are controlled, then it is obvious that the profit of the company will increase. The company can keep this extra profit as the retained earnings of the company, which can be easily transfer from one year to another.
Andrea can propose the General Manger to improve the liquidity position of the company by increasing the current assets base. Increase in current assets will help the accountant improving the financial position of the company and this will ultimately satisfy the shareholders of the company (Chan et al. 2016). This step is not only legal but it is also approved by AASB.
Andrea can suggest the General Manager for following the AASB 116 for determining the valuation of its properties, plant and equipments. This is important because this will help the management understanding the current actual value of its assets (Kelly et al. 2016). Therefore, the management can understand whether they require improving the assets position or not. If the management takes proper steps before hand, then it can save the future of the company.
The accountant can check the current assets base of the company and can eliminate the assets, which are unproductive to the company. As the economists have forecasted that in 2018 and 2019, the financial situation of the company will go down; it is obvious that some of its assets of will become unproductive during these financial years (Yilmaz and Buyuklu 2016). Therefore, it is the duty of the accountant to take proper care of the assets base of the company and eliminate the probable unproductive assets.
Andrea can suggest the General Manager for improving and updating the pricing policies of the company. Improving the pricing policy, the management of Cocoa Ltd can improve the revenue of the company in future. If the company will be able to increase the total amount of revenue, then it will be able to increase the profitability of it (Molla et al. 2016). This means, the overall financial health of the company will be improved.
The accountant can maintain the transparency level in the financial reporting. If the company follows proper transparency policies, then the trusts of the shareholders on the organization will increase and that will help the company attracting more shareholders or investors (Ararat, Black and Yurtoglu 2016). If the number of shareholders increase or the amount of investment increases, then it can improve its financial position in a better way.
Therefore, from the above discussion, it can be said that there are several possible strategies available to the management of Cocoa Ltd that can solve the ethical dilemma of Andrea.
Conclusion
In this study, it has been identified that the current financial situation of Cocoa Ltd is good but the economists have forecasted that in the near future, the company may face financial downturn. In order to manage the situation the General Manager of the company asked the accountant to transfer the current profits to the future years. This has created a dilemma in the mind of the accountant. The study has identified that the corporate governance of the company is much weak. However, the accountant of the company can take many other steps to avoid the ethical dilemma. The steps are – increasing current assets, following AASB 116, controlling cost and many other.
Reference list:
Aasb.gov.au. 2017. Australian Accounting Standards Board (AASB) – Home. [online] Available at: https://www.aasb.gov.au/ [Accessed 1 Jan. 2017].
Ararat, M., Black, B.S. and Yurtoglu, B.B., 2016. The effect of corporate governance on firm value and profitability: Time-series evidence from Turkey. Emerging Markets Review.
Chan, K.C., Fung, A., Fung, H.G. and Yau, J., 2016. A citation analysis of business ethics research: a global perspective. Journal of Business Ethics, pp.1-17.
Chell, E., Spence, L.J., Perrini, F. and Harris, J.D., 2016. Social entrepreneurship and business ethics: does social equal ethical?. Journal of Business Ethics, 133(4), pp.619-625.
Kelly, G., Delaney, D., Chai, G. and Mohamed, S., 2016. Optimising local council’s return on investment from annual pavement rehabilitation budgets through targeting of the average pavement condition index. Journal of Traffic and Transportation Engineering (English Edition), 3(5), pp.465-474.
Kumar, P. and Zattoni, A., 2016. Corporate Governance, Board Gender Diversity and Firm Performance. Corporate Governance: An International Review, 24(4), pp.388-389.
McCahery, J.A., Sautner, Z. and Starks, L.T., 2016. Behind the scenes: The corporate governance preferences of institutional investors. The Journal of Finance.
McConnell, J.J. and Qi, Q., 2016. Just Talk? CEO Succession Plan Disclosure, Corporate Governance and Firm Value.
Molla, M.S., Miraz, M.H. and Habib, M.M., 2016. A CRITICAL REVIEW OF RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND FIRM PERFORMANCE: IN MALAYSIAN PERSPECTIVE.
Panditharathna, K.M., 2016. Corporate Governance and Firm Performance.
Paull, C., 2016. Alternative assets insights: Fixed assets-a case for further inspection. Taxation in Australia, 51(6), p.325.
Steenkamp, N. and Steenkamp, S., 2016. AASB138: Catalyst for managerial decisions reducing R & D spending?. Journal of Financial Reporting and Accounting, 14(1).
Weiss, J.W., 2016. Business Ethics: A Stakeholder & Issues Management Approach, 2014. Cyrus Chronicle Journal, 1(1), pp.66-69.
Wong, J., Wong, N. and Jeter, D.C., 2016. The Economics of Accounting for Property Leases. Accounting Horizons, 30(2), pp.239-254.
Yilmaz, C. and Buyuklu, A.H., 2016. Impacts of Corporate Governance on Firm Performance: Turkey Case with a Panel Data Analysis. Eurasian Journal of Economics and Finance, 4(1), pp.56-72.
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