Discuss about the Accounting Case Study for Manipulations and Fraudulent.
1: In the news coverage it is mentioned that all companies are always interested in the presentation of financial reports and statements in such a manner that it looks like very glossy and bright but in actual sense it something else. This is very much when checked in details then lot of manipulations and fraudulent entries or transactions are found then they no more remain that bright as presented.
The newspaper which is in reference is the New York Times. An article on accounting is written by Peter J.Henning dated 12th September, 2016 and it is titled as “Polishing Financial Results Looks Good, but Can Lead to Fraud”. A report by Standard & Poor’s indexing on companies reporting standards have mentioned that an estimate of 448 companies studied out of 500 companies, it is observed that those 448 companies are using the non-GAAP or non-Generally Accepted Accounting Principle methods for the maintenance of their business accounting operations and only 52 are actually following the Generally Accepted Accounting Principles or GAAP methods to record all business transactions and financial activities (Bolt. Lee, 2010).
The companies those used non-GAAP methods are always tend to show the financial reports after exclusion of many transactions which may not be of much usage in the future but it actual shows the financial result as much brighter but actually hazy. The note of Jason Voss in The Enterprising Investor blog “The non-GAAP metrics tend to move in only one direction: up”.
The news has highlighted two events that shook the business world and also presented financial results in a greatly manipulating manner.
A real estate company American Realty Capital Partners, a non GAAP methodical company which became Vereit last years after changing name. The company’s former chief financial officer, Brian Block was charged last week by The Justice Department for filings wrong financial reports with the Securities and Exchange Commission and also for conspiracy, securities fraud, inflating company’s funds from business operations. Although the lawyer of Brian Block gave claimed that he is absolutely innocent and he will relieved by the court (Expertscolumn, 2016).
The former chief accounting officer of the company, Lisa P. McAlister is also found guilty in charges of financial misrepresentations and fraudulent activities done but is under waiting till the judgement and prosecution of Block is not over. Lisa have admitted in her statement that she was directly involved with Block to do the cover up of the false statements presented. Actually in the first quarter of 2014, there was a mistake in the figure of funds from operations adjusted and there was no rectification done to this mistake observed. But instead Block and Lisa teamed up to change the excel figures to show the financial reports very bright although it was inflated(Voris, 2016).
The American Realty’s financial reports were correct as per the GAAP but the main figure of FFO or Funds from Operations is manipulated internally to inflate the financial results so that the overall reporting looks like very attractive for all stakeholders. In the real estate market all investors are taking look only at Funds from Operations and if this is good then the company is in good financial status. The National Association of Real Estate Investment Trusts, the leader in the real estate industry has stated that FFO is the only figure all stakeholders in real estate business try to understand. This is the figure which is used in the real estate industry to measure and compare all companies and how they are financially healthy. Hence when this figure is misrepresented it amounts to intentional fraud and deliberate non disclosure or real facts and suppression of actual facts.
Any investor can get mislead if any company following non-GAAP methods present any wrong figures in the accounts resulting in overall inflated results. The American Realty case was first found in October, 2014 and its chief executive said that they had no bad people but some bad judgement have made the differences. In December, 2014 Lisa have filed a lawsuit against the former chief executive and founder of American Realty, Nicholas Schorsch saying that she was sacked by the company as she have highlighted in public that the company had fraudulent practices. But instead later last week the S.E.C. has filed a case against Block and Lisa for violation of securities and she will be in no way being eligible for any award.
The Wall Street is very touchy place where minor changes in the share prices can be havoc for the entire market and hence the financial executives always have to be very cautious about any figures they present and these should be correct. The American Realty loss due to wrong FFO was only 3 cents per share in the first quarter of the 2014 but still the financial executive will be under fire from the chief executive and the investors.
The car company Fiat Chrysler is facing the wrath of the SEC and the Justice department for showing wrong car sales on monthly basis as inflated figures.
The company planned to show the sales results for 75 months in a row after the financial crisis of 2008-09. The actual fact was disclosed by the company after 40 months and it was very shocking for the investors.
The New York Times have taken up this reporting of the investigation in July y the Justice Department’s visits at the company’s Michigan Headquarters and also at its various dealers to learn from them how these sales figures were being shown inflated.
The sales reposting method was changed after it was got highlighted that they are inflating the sales figures to show how they are performing in the period just after the financial crisis the world over. This change was reported by the spokeswoman of the company who said that it is an opportunity to become more transparent.
The non-GAAP methods are followed by many companies are done with a motive to show the glossy financial pictures only but they also don’t understand that their misdoings are getting exposed by the media reporting and by this they are getting under judicial cases and coming under investors wrath.
The SEC’s chairwomen highlighted that Chrysler will not be convicted for showing inflated sales figures as this not amounting to any enforcement action as it is not that gross misdoing. But she also said that the non-GAAP following companies must take extreme care in financial reporting and try to change the method to GAAP format as soon as possible so that such errors can be stopped or reduced to greater extent.
In her Fair Game column in The New York Times Gretchen Morgenson wrote in April, “Creativity abounds in today’s freewheeling accounting world”. The company’s are presenting too many financial reports to show their status, but too many of them are painted as a too rosier than what they are actually, which suggests that too much is not better too correct is much better even it is less.
Concepts, Ideas and Facts—the basic details from the above news coverage that we have found is that there is two violations—one the GAAP was not followed and also the accounting ethics was not complied at all.
GAAP or Generally Accepted Accounting Principles—these are the basic and mostly accepted standards of accounting followed throughout the world. Its usage is accepted as its framework and guidelines are falling in any given jurisdiction. These include the conventions, standards and rules for all accounting functions world over which are followed by accountants. But there are many exceptions to the business opting out of GAAP practices for cash basis which is opposed to accrual basis.
The details of the some examples of GAAP—
International—International Financial Reporting Standards—IFRS
For Domestic—
Many companies of the world are opting to convert to IFRS as the standard is of International type. Many companies also follow their country specific accounting principles.
All listed or large companies are conforming to IFRS. All listed companies from European Union are part of IFRS since 2005 and Canada started IDRS in 2009, Taiwan in 2013.
In the above report it is evident that GAAP not being used the company got an added advantage to make the statement false thus making the financial report inflated and showing good for investors.
the professional accounting is supposed to follow the various ethics for the purpose of correct and true accounting. The main attributes of the accountants for the same is like
Integrity—a professional accountant must have high integrity, honesty, dedication level.
Professional attitude—a professional accountant must not do anything to bring bad name and must be aware of all legal framework.
Confidentiality—a professional accountant must keep all information gathered due to the association with various places of work and should share such information with any other third party or for any personal gains.
Objectivity—a professional accountant must always avoid doing any biased attitude, conflict of interests, or to avoid making any undue advantage on others by coercion.
Professional attitude and all care thereto—a professional accountant must take care of the legislation, techniques, technical and professional standards.
In the above report it is evident that the accounting ethics were not followed and this resulted in inflated and false financial reports and change of actual figures making company looking healthier.
2: AASB-1-July, 2015-First-time Adoption of Australian Accounting Standards.
Comparison with IFRS 1—AASB 1 is the First Time Adoption of Australian Accounting Standards are adopted from IFRS 1 and some parts are entered with Australian context.
Tier 1—
AASB 1 also complies with IFRS 1 in the cases of profit based entities.
AASB 1 also complies with IFRS 1 but certain entries are made for Australia specific for all non-profit entities giving detailed guidelines.
Tier 2—
AASB 1 also complies with entities where general type of financial reports is being prepared and only Reduced Disclosure Requirements will not be under compliance with IFRS 1.
AASB 1 is adopted by The Australian Accounting Standards Board making it the valid standard under section 334 of the Corporations Act, 2001 (Aasb, 2016).
Major issues in new standard—
Objective—the financial reports and statements prepared under this standard must be having very high quality information that –
Can be produced at a cost which is below the benefits provided.
Can be compared over period of time and become transparent.
Can have a suitable starting time.
Scope—the new standard will be applied by entities for making first Australian Accounting Standards financial reports. And for any type of interim financial reports and statements.
Recognition and measurement—all entities must use this new standard for the purpose of preparing of all financial statements based on First time accounting standards of Australia and all of these statements should be comparable (Ey, 2014).
There are also exemptions to this point where the entity can be exempted as per exemptions mentioned in the Appendices C-E.
Presentation and Disclosure—this new standard does not provide any relief from exemptions to the presentation and entire disclosure of all types of financial information’s and statements.
The new standard provides that an entity should be bound to present minimum three financial report or statements, two statements of comprehensive profit or income and profit & loss account, two separate statements of profit and loss, two statements of cash flow statements, two statements of any change effected in equity holding and notes thereto, and also all comparative statements based on this standard.
Effective Date—from 1st January, 2018 latest but could have been applied from 24th July, 2014.
Commencement of The Legislative Instrument—to comply with legal forums this new standard will get effect from 31st December, 2017.
Withdrawal of AASB Pronouncements—this new standard was present earlier also in different form in May, 2009 when it was repealed. But although it was repealed, it was in active usage in relation to individual or to general use. It was applied under section 334 of the Corporations Act (Charteredaccountants, 2016).
The entities who are the main stakeholders in the accounting standard formulation have to disclose their opinion before the finalisation of the standard and later on implementation. Unless and until particular opinion and interpretations are interconnected and then the standard would become irrelevant. The revelation of the accounting standard and the formation of opinion are completely based on the stakeholders. There are key standards which are to be issued in relation to the accounting and the maintenance of accounting.
The accounting standard is generally formulated and later on the standards are made applicable. IFRS 15 Revenue from contracts was issued in way back 2014 but it is to be implemented in 2018, likewise the same standard based on IFRS 15, AASB issued AASB 15 and equivalent standard to which is yet to come to effect (Charteredaccountants, 2016).
The accounting standards are issued after considering the opinion from the accounting professional and business class and of general public. It is important build consensus on those accounting standards but is often seen that there are some dissenting voices. The new standard may hamper some industries and that would have significant implication in business reporting. Therefore the dissenting voices are expected to come out in the forum. If the example of AASB 15 is to be brought here, the target of the standard is to formulate following:
The single revenue recognition model is of transfer of goods and of the services as this model will improve the comparability over a range of industries.
The removal of certain inconsistencies and weaknesses in the existing system of revenue recognition.
The preparation of the financial system is to be simplified based on the standard.
There are industries which have already adopted the revenue recognition process based on previous standards, but application of the new standard may go against the interest of the business. Therefore the dissenting voices are expected to come up.
There are various sides of an interpretation. The stakeholders will have to protect their interest. The significant variation would simply paralyze some of the business and entities. The accounting has to involve the new ideas in the business to the best available manner. The need of the accounting standard is to guide the recording of the financial information. The utmost necessity is implementation part where the role of the public and other entities become important based on the set of rules and guidelines for recording of such information. The intricacies of accounting practices allow companies and other organisations to record financial transactions for that benefit (Ifrs, 2016).
References:
Aasb. (2016, 09 21). News. Retrieved 09 23, 2016, from www.aasb.gov.au: https://www.aasb.gov.au/News.aspx
Accountingexplanation. (2016). Cost of Goods Sold Statement:. Retrieved 09 06, 2016, from www.accountingexplanation.com: https://www.accountingexplanation.com/cost_of_goods_sold.htm
Bolt. Lee, E. C. (2010). Highlights of Finance and Accounting Ethics Research. Retrieved 09 21, 2016, from www.journalofaccountancy.com: https://www.journalofaccountancy.com/issues/2010/oct/20102896.html
Charteredaccountants. (2016, 09 21). AASB issues 2015 amending standards. Retrieved 09 21, 2016, from www.charteredaccountants.com.au: https://www.charteredaccountants.com./Industry-Topics/Reporting/Current-issues/Convergence/News-and-updates/AASB-issues-2015-amending-standards
Charteredaccountants. (2016, 09 21). Revenue Recognition. Retrieved 09 21, 2016, from www.charteredaccountants.com: https://www.charteredaccountants.com./Industry-Topics/Reporting/Current-issues/Convergence/News-and-updates/Revenue-recognition
Expertscolumn. (2016). Accounting- Need And Importance. Retrieved 09 21, 2016, from fareedsiddiqui.expertscolumn.com: https://fareedsiddiqui.expertscolumn.com/article/accounting-need-and-importance
Ey. (2014, 03 31). New accounting standards and interpretations . Retrieved 09 21, 2016, from www.ey.com: https://www.ey.com/Publication/vwLUAssets/EY_-_Endeavour_supplement_31_March_2014/$FILE/ey-endeavour-new-accounting-standards-31mar2014.pdf
Iata. (2014). Airline Disclosure Guide. Retrieved 09 15, 2016, from www.iata.org: https://www.iata.org/publications/Documents/Airline-Disclosure-Guide-hedge-accounting.pdf
Ifrs. (2016, 09 21). IFRS Application Publication Around the World urisdictional Profile. Retrieved 09 21, 2016, from www.ifrs.org: https://www.ifrs.org/Use-around-the-world/Documents/Jurisdiction-profiles/Australia-IFRS-Profile.pdf
Voris, V. (2016, September 09). Ex-American Realty CFO Block Charged With Accounting Fraud. Retrieved September 24, 2016, from bloomberg: https://www.bloomberg.com/news/articles/2016-09-08/two-american-realty-capital-executives-sued-over-earnings-report
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