Creative Accounting And Financial Reporting: A Case Study Of BHP

Accounting Policy Choice and Creative Accounting

Discuss about the Creative Accounting and Financial Reporting.

There has been an increase in the number of accounting standards that have been backed by the legislature. Every organization is required to have an accounting method depending on its size and its decision since some financial aspects are not addressed in some accounting standards, some do not contain the retires for selecting the best among them, and the accountants are required to make the best choice from the variety of estimates. This need for the option is outlined in AASB 108. Accounting methods are the rules followed by an organization during the reporting of its revenues and expenses in its financial statements mostly on a balance sheet (Jones, 2011). There are two major types of methods are cash accounting basis and accrual accounting basis, the choice of either of the methods depends on the accounting standards for revenue earned by a business and the selection of the company itself. Mostly small businesses go for cash accounting which does addition of cash, checks and fair market value of property of services during the year and expenses are considered in the year in which they paid, on the contrary, the accrual method is based on a matching principle where the emphasis is on the timing of revenue and expenses recognition   and expenses are deducted in the balance sheet in the tear according to contract even when the money will be paid later. Once accompany has selected an accounting method they cannot quickly change until they receive consent from IRS body and changes in accounting method will result to improve overall accounting in an organization. This paper will address the requirement for accounting policy choice and creative accounting and accounting policy choice and opportunistic behavior in the case study of BHP. BHP was formerly known as BHP Billiton in Australia. It is a mining and metal company that provides products such as petroleum iron ore, copper natural gas, nickel, and uranium in the evaluation of their annual report 2017.

An accounting policy is standards that dictate how a company prepares its financial statements (Mulford & Comiskey, 2011). While creative accounting refers to a situation where the choice of accounting policy is attempted to produce an impression desired by the people preparing the statement, it sometimes can be viewed as underhanded means because the accountants provide a statement that it is biased and unreliable in trying to meet a perception. This can be achieved in four ways which are choice of accounting policy, biased estimates or predictions, and timing of the transaction. Below are the identification and explanation of how accountants in BHP company are ‘creative’ in preparation for their accounting standards

Opportunistic Behavior in BHP’s Financial Statements

There is a group of accounting of policies that might rely on the estimates or predictions of the future events and occurrences.There are a group of shareholders and investors who would like to use the information that is obtained on the annual report in their quest of making decisions. In this annual report by BHP, it is evident that they are among the best companies that recorded the most significant profit in the mining industry and they are positive concerning the future also because of the risk management factors that they have put into practice.

However, there is an aspect of creative accounting that can be seen in their annual report most especially regarding the effect of taxes and market changes on their future prediction; the report indicates stability in the dealing with future liabilities regarding debts. But it has been established that the company has had problems since 2012 in dealing with bad debts. This could continue to affect its performance. Other significant issues that have not been addressed in the annual report that could affect its future are the changes in the market regarding competition. There has been an increase in the petroleum market. They are challenged by the current competition. There has also been a reduction in some countries in need of their product. An example is an ongoing decline in the demand for its products by the Chinese government. In a statement, the company manager said: “the prices that are obtained from our oil, gas, mineral and another commodity which are determined by or linked to prices in the world market.” However, this as a factor that could influence the future of the company is not included in the annual report which could help any person with the plans of investing in the organization to recognize and know what they are going up too. Other practices that are key in the future of the organization that have been observed in showing creative accounting within the organization are fictive sales that have also been seen in the postponing of the recognized revenues in the attempt of reducing profit as a way of preparing for the future yet there is the risk of this capital reducing their market value. Lastly, another practice observed in the making of future predictions based on several assumptions due to their current robust performance. The projections may be elusive if not made on the grounds of statistics indicating constants and variables in the future rather than just in the current performance.

Identifying Instances of Creative Accounting

As a way of creative accounting, the accountant in the organization who prepares financial statements may decide to use a material factor in confusing or changing the focus of the stakeholders and shareholders away from an issue to another (Di Pietr, & Ronen 2016).

 

This method has been used in BHP Company. The object that has been used to get everyone away from other factors in the organization that requires being considered according to the company annual report is the financial growth or status that the company has. In the report, the company is labeled as the best mining company with a net profit of $5.9 billion an underlying EBITDA of $20.3 billion with a cash flow of $12.6 million (Karim, Shaikh, Hock, & Islam, 2017). The more significant part of the report is mainly composed of this kind of performance analysis. This is where the company analysis is majorly in its success and touching very little on the other issues such as the case in the reduction of the production of iron ore and other minerals. Also, the fact that the companies market is continuing to reduce. An example is the one of the Chinese demand. The competition is getting stronger due to the mining products for Asia and the Middle East. In their strategies, they have failed to include how they are going to deal with the decrease of the raw material. Instead, they have included oil reserves as their assets as incorporated in the balance sheet

AASB 108 requires that the choice of accounting policy is relevant and reliable and that it advocates for transparency of the dealings of the company. On the contrary, accountant maybe creative in the policies they chose for different reasons. The same is seen in BHP formerly known as BHP diligence when looking at the accounting policy in the presentations of its financial disclosure which influence the decision of the investors and shareholders and in its consolidation of financial accounting (Rajput, 2014).

Some indication of creativity in accounting policy of the company can be seen in the following areas. The first one is the disclosures about mineral reserves and resources?. Even though the mineral reserves are the most valuable assets of a mining industry, they do not appear as an asset on the balance sheet except to the extent they were purchased. Otherwise, that cost of mineral reserves is often not disclosed separately from other mining-related fixed assets (Bora, & Saha 2016). Mineral reserves are as a result of company exploration activities. Even though they are very vital to the investors and analysts in prediction of the future of the shareholders and investors since they help in the prediction of cash flow and evaluation of the future of the company, this is because the quantity of mineral in the earth could not be explicitly quantified in order to enhance accuracy BHP has disclosed its mineral reserves in the annual report with various intentions that will be disclosed in the second part. This is a form of creativity that could help in the manipulation of the balance sheet since the quantity can be varied to produce the desired outcomes. The AASB 108 requires that accounting policies be disclosed in case of any changes for transparency for the stakeholders and the shareholders. However, this perhaps has not been so in trying to recognize or find out the reason behind the policy that is used in dealing with the taxes of the organization that was a problem in the organization. Other areas where the statement preparers have practiced creative accounting as seen in their annual accounting methods are the increasing of their expenses with the excuse of the provision to the environment which could be a method of trying to adjust the depression. There has been the changing of the depreciation policy particularly the period (Jain, & Balyan 2015). There is also the selection if the fixed assets in an aim of increasing the profits expenses of the company have been accounted for in the basis of percentage of earning that is retained by the organization instead not played out as dividends of tee company instead of including them in the profit and loss statements. In the attempt of reducing the liabilities this company the extra balance financing on account of branches that are not included in the profit and loss account. Another creative accounting observed in the annual report of BHP 2017 is that there is temporary inclusion and assignment of holdings at elevated high market value as compared to their purchase and immediate price in the market.

Conclusion

The primary purpose of the commercial organization is to generate profit, and this is the case in the above examples. There are reasons for the practices of creative accounting used, and they can be seen within these three explanations of choices made a hypothesis:

The primary motivation of this company for using this method is in line with income smoothing hypothesis. THis is where the company has failed to clearly show in its reports the effect the debts and market changes which could affect the company negatively. This hypothesis applies here in that the statement preparers do not want the shareholders to see that this could lead to looses in the organization shortly. This is because if it does they may not benefit, this creative practice could also be in line with the capital market motivation where they do not want to disclose the information on strict competition reducing the market and since it would lead to pulling out of investors and shareholders that could not be good for the organization.

The main reason why BHP has failed to disclose some challenges that are affecting the company such as decline in some mineral reserve despite generating the report containing their strategies and ways of dealing with some issues is in line with contractual motivation where the statement preparers are concerned with the loss that might occur to them considering their self-interest, therefore, they generate report with good performance ignoring some very fundamental parts.

Thi is the main reason for using accounting policies which shows that the company is increasing the assets and decreasing the liabilities in its operation regardless of the activities that are undertaken to undertake this objective (Akpanuko, & Umoren 2018).  This is due to the capital market motivation to maintain their gains and remuneration. Thus the shareholders and managers need to keep their shares in the company.

Accounting policies and standards are several, and they keep changing in Australia which prompts for decision making in the choice of the best strategy. Opportunistic behaviors by managers are where the managers choose accounting policy that is based on a meeting of their self-interest at the expense of the others which may include the owner (principal).

BHP has joint ventures with other organizations which automatically makes them have interest in the assets and management decisions by those organizations. They have experienced problems with the management decisions in terms of finance since they produce losses as the mangers increase their salaries (Bhasin, 2015). When asked the managers to tag this behavior to the difference in standards which still does not justify their behavior. To control this opportunistic behavior and create a good relationship between the manager and the owner, a contact is used that controls the action of the manager which help n regulation of the opportunistic theory in which these managers are benefiting illegally. To deal with this the contract could include that part of the salary of this manager could be tagged to the profit hence the manager would work hard to produce more profit in earning income. They may also use bonding to limit the manager from the joint venture from engaging in activities that take a lot of the company money example they could regulate the frequency of air travel of the manager by commercial chopper.

Conclusion                                                   

In conclusion the increase in standards and policies in the country calls for an informed decision from the management and the accountants in the policies that are most suitable to be used without going against the available legal obligations and expectations given to them. Creative accounting methods as survival methods by the mangers in an organization should be eliminated to encourage transparency, integral and principled carrying out of accounting method and accounting activities.

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