Discuss about the Analysis of Case of Cocoa Ltd.
It is essential for the organizations to have strong corporate governance mechanism to achieve the objectives and goals. The corporate governance mechanism is the system that sets rules for guidance of the personnel in the conduct of their duties. The corporate governance system should ensure that the management of the company works in accordance with the terms of the code of conduct (Sison, 2010). The code of conduct for the employees is essential to command their conducts and ensure that they work for the overall interest of the company setting aside their personal interests. In context of this, the paper presented here focuses on the corporate governance and the ethical aspects of an organization. The discussion in this paper has been carried out by analyzing the case of Cocoa Ltd which involves the issues related to preparation and presentation of the financial statements.
The accountants carry a great deal of responsibility in preparation and certification of the financial statements of an entity. It is expected from them to discharge their duties ethically and honestly (Duska, Duska, Ragatz, 2011). The paper presented here also deals with this aspect through analysis of the case of Cocoa Ltd. Further, the duties of management and the manner in which they should discharge their duties have also been highlighted in this paper. Overall, this paper presents a concise discussion on the ethical and governance aspect and the duties of professional accountants and the management in this regard.
The emphasis on ethics and the corporate governance has been unprecedented in the past decade all over the world. The regulators around the globe have been more alter to ensure that the organizations conduct their business ethically. The reason for this increased importance of ethics and corporate governance is the corporate scandals. The major corporate scandals such as WorldCom, Tyco, and the Enron happened due to the weak corporate governance mechanism and the lack of ethics in the conduct of duties by the management and the accountants (Bolman & Deal, 2013). The weak governance system in these companies let the management usurp their powers for personal interest.
It is crucial to take note that failure of big corporations like WorldCom or Tyco did not only affect the shareholders and the management of the company, but its severe impact on the society and economy of the country was also perceived (Ferrell, Fraedrich, & Ferrell, 2016). Thus, it is essential to ensure that the organizations should have stringent governance mechanism and promote ethics in the work culture. The principles of corporate governance talk about strengthening the reporting system and making the board of directors accountable for effective leadership. The principles of ethics and governance require that the supreme authority of the company’s management needs to be independent and free of biasness. In a corporation like Cocoa Ltd, the supreme authority of management vests in the board of directors (Ferrell, Fraedrich, & Ferrell, 2016).
The board of directors owes duties to the shareholders as well as other stakeholders of the business, thus, they should act honestly and independently. Further, the functioning of the board should also be under supervision of the regulatory authorities of the government (Ferrell, Fraedrich, & Ferrell, 2016). Further, there must be a proper mechanism to have vigilance over the activities of the board of directors and other key managerial personnel. Through this mechanism, it is to be ensured that the management is not allowed to exercise powers for their personal interests. The corporate governance system should be equipped well to identify the situations where management’s personal interest could conflict with the company’s overall interest (Ferrell, Fraedrich, & Ferrell, 2016).
It is argued that management decisions influenced by their personal interest damage the company’s financial performance. Further, the revelations of the fact that the management used their powers for personal interest could also be serious for the reputation and goodwill of the company in the market (Ferrell, Fraedrich, & Ferrell, 2016). For example, management may manipulate the financial statements of the company to show good performance to earn high incentives. In this situation, the management may show fake profits in the income statements that can never be realized by the company. The accumulation of unrealizable profits results in overvaluation of the assets which could be dangerous for survival of the company in long run (Ferrell, Fraedrich, & Ferrell, 2016).
In the case of Cocoa Ltd, there has been observed conflict between the personal interest of the management and the company. Further, the accountant is also a party that conflict of interests. In the current case, the company is performing outstandingly well presently and it is expected to continue for couple of years more such as 2016 and 2017. However, after these two years, it is expected that the economic conditions will reverse affecting the financial performance of all companies in the industry for 2018 and 2019. Now, the management does not want to report losses in the year 2018 and 2019 when the economic downfall will dominate. The management wants to report equal profits in all four years by diverting the profits of current years to 2018 and 2019. For this purpose, the management seeks advice from the accountant of the company. In response to the management query, the accountant advises for carrying out change in the method depreciation from straight line to sum of year’s digit. Knowing that there is no justified reason for this sudden change in the method of depreciation, accountant carried out the changes. The accountant has contract for renewal with the company, which depends upon the management’s satisfaction with his services. Thus, considering personal interest, the accountant agreed to carry changes in the method of depreciation.
The issue under consideration in the current case of Cocoa Ltd is analysis of the change in the method of depreciation in the context of ethics and corporate governance. In this regard, it is crucial to first understand the legal requirements of financial reporting in relation to depreciation accounting. After that an analysis of the impact of such change on the company and all the stakeholders is important. The analysis of legal requirements and evaluation of the impact of change would form the basis to conclude that whether the standard of ethics and corporate governance violated or not in the current case.
The legal requirements in relation to charge of depreciation are contained in AASB 116, “Property, Plant, and Equipment” (AASB 116, 2016). The accounting standard does not specify anything in regard to selection of method of accounting. Thus, the organizations are free to opt for any method to charge depreciation on property, plant, and equipment. However, the accounting standard puts a condition in this regard that the method chosen by the organization should reflect the consumption of future economic benefits adequately. Further, it has also been provided that the firms should apply same method in each of the following accounting periods that means there must be consistency in the charge of depreciation (AASB 116, 2016).
There are various methods that are used to charge depreciation such as straight line method, diminishing value method, sum of year’s digit method, production unit method. All the methods of accounting has their own advantages and disadvantages, therefore, it is necessary to analyze as to which method suits best in the given circumstances (Godwin & Alderman, 2012). The straight line method provides for equal amount of depreciation for each year. It is widely accepted method of depreciation, however, in certain circumstances it may not be the right choice. For instance, the assets which carry risk of technological changes may need to be depreciated rapidly in the earlier years. Since, the straight line method provides for equal depreciation charge for all years, thus, it may not be suitable method in this case (Godwin & Alderman, 2012).
Further, apart from straight line method, the diminishing value is also one of the most used methods for charging depreciation. In this method, the depreciation is computed on the written down value of the assets each year. This method is considered to be the best for the purpose of matching the revenues with cost (Godwin & Alderman, 2012). Further, there is sum of year’s digit method which is also used by the firms in computing depreciation. This method computes higher depreciation in the earlier years as compared to the later years of use of asset. This implies that as the useful life of the asset is approached, the depreciation charge goes down. Thus, it could be observed that different methods compute different amount of depreciation which will affect the profit or loss for the year (Godwin & Alderman, 2012).
Thus, it clear that the selection of method of depreciation should be based on the analysis of the asset’s nature and the circumstances in which firm operates. Further, the selected method should be applied consistently from year to year so that the financial performance is correctly reflected (Delaney & Whittington, 2009). However, consistency does not mean that the firms can not change the method. The change in the method of depreciation is permitted when it is for justified reasons. This implies that the changed method should match the revenues and costs more appropriately then the existing method. Further, there are reporting and disclosure requirements in regard to change in the method of depreciation which the firm must comply. The AASB 116 requires that the reason for change is adequately reported in the notes to accounts and the impact on the profit or loss of such change in separately reported in the income statement (AASB 116, 2016).
In the current case of Cocoa Ltd, the accountant has violated the provisions of accounting standard in regard to change in the method of accounting. The accountant did not report the reasons for change in the method of depreciation which one of the most crucial requirements of the accounting standard (AASB 116, 2016). Further, the analysis of the case depicts that accountant gave preference to his personal interest rather than company’s overall interest. Thus, the conducts of the accountant could be said to be clearly violating the standards of ethics. Further, the intention of management also appears to be to deceive the shareholders and the public. Thus, the conducts of the management are also violating the standards of ethics and the corporate governance (Ferrell, Fraedrich, & Ferrell, 2016). The impact of violation of standards of ethics could be severe on the company.
Conclusion
The discussion in this paper is focused on the ethical and corporate governance aspects. It could be articulated from the overall discussion carried out in this paper that compliance with the standards of ethics is crucial for the achievement of objectives for each and every organization. Further, the organizations should also have proper governance mechanism that prevents the management from usurping its powers. In the current case of Cocoa Ltd, the management exercised its power for to deceive the shareholders by manipulating the financial statements. The change in the method of depreciation in the current case is completely unethical and illegitimate. The motive to change the method of depreciation is to manipulate the profit in the books of accounts and deceive the shareholders.
Cocoa Ltd should have a proper corporate governance mechanism and code of conduct for the employees. The code of conduct will help the company to command over the conducts of the employees and ensure that they act in the best interest of the company. Further, it is advisable to Andrea (Accountant of the company) to go through the requirements of AASB 116 in regard to change in the method of accounting. The accountant should comply with the reporting and discloser requirements of AASB 116 (AASB 116, 2016). It is recommended for the accountant to specify the reason for change in the notes to accounts and mention that it is improper. Further, the accountant should, setting aside his personal interest, work in the best interest of the company (Kurtz & Boone, 2008).
References
AASB 116. 2016. Property, Plant, and Equipment. Retrieved January 15, 2017, from https://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun14_07-14.pdf
Bolman, L.G. & Deal, T.E. 2013. Reframing Organizations: Artistry, Choice, and Leadership. John Wiley & Sons.
Delaney, P.R. & Whittington, O.R. 2009. Wiley CPA Exam Review 2010, Financial Accounting and Reporting. John Wiley & Sons.
Duska, R., Duska, B.S., Ragatz, J.A. 2011. Accounting Ethics. John Wiley & Sons.
Ferrell, O.C., Fraedrich, J., & Ferrell. 2016. Business Ethics: Ethical Decision Making & Cases. Cengage Learning.
Godwin, N. & Alderman, C. 2012. Financial ACCT2. Cengage Learning.
Kurtz, D.L. & Boone, L.E. 2008. Contemporary Business. Cengage Learning.
Sison, A.G. 2010. Corporate Governance and Ethics: An Aristotelian Perspective. Edward Elgar Publishing.
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