The given case is developed on a specific corporation, named Sunshine Limited in which the General Manager (GM) Kam Sunshine has moved to the accountant, Maria Mars. Essentially, the primary intention was to undertake certain modifications in the firm’s received profit of the corporation distinctly. In itself, this has placed Maria Mars in an ethical dilemma, since she has been anxious about the renewal of the agreement with the corporation. Regardless of knowing that actions are immoral, Maria has altered the mechanisms of depreciation from the straight line method to particular system of sum-of-years-digits’ techniques. Therefore, the stakeholders recognized in the given scenario includes shareholders, governing bodies and societies, firm’s partners as well as suppliers, creditors, debtors, financial accountants and general manager of the business. The ethical concern presented upon Maria Mars have been elucidated in detail and the principles that the corporation has violated include inadequacy of transparency, violation of objectivity as well as objectivity. However, as a concluding point, the overall role of Maria in the process of altering depreciation mechanisms has been illustrated in the compliance with the necessities of the corporation and the influence of standard AASB 116.
As rightly put forward by Garegnani et al. (2015), ethics as well as governance is necessarily about ethics and principles, and it is not forced on anyone. Nevertheless, pursuing ethics is effectual, as the level of confidence of users would be enhanced with augmentation of quality and work. The following features are the issues associated to ethics as well as governance of the firm Sunshine Limited.
Basically, the shareholders of the business concern have the authority to be aware of firm’s profitability regarding their investments. Founded on the alteration associated to profitability in their investments, they possess the authority to determine whether to retain the shares in the corporation (Henderson et al. 2015). In a bid to satisfy Sunshine Limited’s shareholders, Kam Sunshine has masked the fact of altering the depreciation mechanism for generating illusion of higher profit.
Sunshine Limited’s general manager has exploited the senior management of the corporation for private benefits and the accountant has aided the person in attaining the same. In itself, the business concern has utilized diverse mechanisms of depreciation on particularly fixed assets to illustrate the influence of devaluation. Again, the mechanism of depreciation could reflect the circumstances in which the future advantages of the assets are anticipated to be incurred (Warren and Jones 2018). In itself, Maria has altered the mechanisms of depreciation that again could lead to variance in timing of the scheme of depreciation. Owing to this, shareholders’ decision might get influenced by the actual decisions by the approximations of error (Knechel and Salterio 2016). Essentially, the accountant is responsible, to reflect accounting information in an effectual way and any modification in the financial assertions have the need to be pronounced. Basically, this is against the working ethics and moral of the accountants that precisely has violated the overall objectivity of the principle.
Founded on the information given in the present case study, the accountant Maria Mars has arrived at the decision to alter the technique of depreciation from mainly depreciation to essentially the sum-of-years digits mechanism. The primarily intent of utilizing the sum of year mechanism is to lessen the overall profit level in the future period for altering the same to financial year 2018 as well as 2019 for combating the expected economic slowdown.
The following example can be presented for illustrating the case
Asset cost=$500000
Economic Life= 5 years
Salvage Value=$ 50000
At the moment, the association between profits utilizing the above mentioned mechanisms of depreciation is reflected succinctly hereby below:
Straight line mechanism of depreciation:
Straight line method depreciation is calculated by deducting salvage value from the asset cost and thereafter dividing the same by economic life (Othman and Rahman 2014)
Therefore, Depreciation amount (using straight line method) =$(500000-50000)/5=$90000
Depreciation using the sum of years digits mechanism
Sum of years digits mechanisms can be calculated by using the following formula:
Depreciable base * (Remaining economic life/sum of years digits)
Sum of years digits is calculated by using the formula: n (n + 1)/2
Sum of years digits is therefore equal to [5(5+1)/2] =15
Upon modification in the system of depreciation, the total depreciation amount might get augmented during the initial years; nonetheless, it would have the inclination to lessen in the later period. Essentially, this would aid in maintaining the level of profits over the time period by minimization of charges of depreciation over the time period (Ferrell and Fraedrich 2015). Therefore, Maria Mars has intervened and altered the mechanism of depreciation for the purpose of satisfying the objectives of the firm Sunshine Limited.
According to Carnegie and O’Connell (2014), a stakeholder can be regarded as a specific group otherwise a corporation that is concerned/interested in another corporation. However, in the given case of the corporation Sunshine Limited, the detected stakeholders are as mentioned below:
Essentially, customers can be regarded as the immediate external stakeholders that the corporation Sunshine Limited have the need to take into consideration. So, attracting, retaining and at the same time developing customers’ loyalty can help in making certain financial success during the long term period. In case of business to business operations, firms are necessarily the customers that purchase products for diverse commercial purposes (Miglani et al. 2015).
The government as well as communities can be regarded as the external stakeholders and they are related closely to the firm Sunshine Limited. Essentially, the corporations incur taxes, nonetheless, it is informal expectation of particularly the residents to function in a moral way and keep up the overall environmental sustainability. Also, the societies also expect the corporations to be related to specific incidents as well as regional charitable donations (Dion et al. 2016).
The partners along with the suppliers can be considered to be vital stakeholders in the present competitive landscape (Mascalzoni 2015). In essence, the corporation primarily have the inclination to develop loyal associations with primarily the associated as well as suppliers. This might help Sunshine Limited in generating common objectives, stratagems along with shared vision. Essentially, the sellers as well as buyers might perhaps collaborate effectually in presenting optimum value to diverse end users.
The existing creditors of Sunshine Limited would anticipate that payment deadlines are satisfied consistently. The corporation can enhance associations with creditors and this enhances possibility of acquiring quality financing (Appuhami and Bhuyan 2015).
At the end of June 2016, Kam requested Maria Mars to find out ways of minimizing firm’s profits in the future period starting from 2016. This would deliver consistent profits to the firm and thereby fulfil shareholder’s interests. Maria has transformed the depreciation mechanism but has not divulged the alterations made in financial assertions.
Australian Accounting Standards Board issued standard AASB 116 linked to plant, property as well as equipment (PPE) is necessarily a compiled standard that is applicable to annual reporting periods. This stipulates specific accounting treatment associated to PPE for presenting information to specific users of financial statements in association to firm’s investment on assets and alterations in investment (Laing and Perrin 2014). Primary issues linked to accounting for PPE include asset realisation, determination of carrying amounts, alterations in of depreciation mechanisms and impairment losses.
Particularly, Maria Mars has transformed the technique of depreciation in the given case. The notion associated to depreciation technique is necessarily distributing the overall tangible asset cost over their entire economic life. Again, it can again be witnessed that corporations are engaged in depreciating both fixed otherwise non-current asset for accounting as well as taxation purposes (Laing and Perrin 2014). This has an influence on the reported net earnings of firms whilst the latter has an influence on items of balance sheet.
The firms realise the tax expends and financial reporting purposes. The techniques for calculation of depreciation and years over which assets are depreciated might perhaps diverge between asset types within similar business. Particularly, the accounting standards might spell out since they differ from one nation to other.
The sum of years digits mechanism is essentially an accelerated method to enumerate asset depreciation. The following formula is used for enumeration of value of depreciation:
This specific method reflects the consumption pattern of asset. This is utilized in the absence of particular pattern in which asset is utilized over the period (Laing and Perrin 2014). Essentially, straight line mechanism of depreciation necessarily levies costs uniformly over economic life of asset and is enumerated by the formula:
Essentially, Sunshine Limited is necessarily a departmental store and group members assumes decisions that are developed based on regulations during institution of firms. Consequently, Kam Sunshine has breached firm policy by assuming own decision that again has direct influence on financial statements. Also, modifications were carried out that had the need to be divulged to all the stakeholders (Laing and Perrin 2014). So, it can be mentioned that Maria Mars has not conformed to the necessities of AASB 116.
Conclusion and recommendation
Based on the findings of the study, it can be mentioned that manager’s actions of approaching staff members and presenting suggestions of changing depreciation technique can exert impact on ethical code of conduct. Sunshine Limited’s accountants have undertaken actions out of dread of contract renewal and negative opinion for behaving against manager’s orders. It can be witnessed that profits of the firm would remain same with alteration in depreciation technique owing to minimisation of charges of depreciation. Essentially, this does not comply with the AASB 116 directives since the accountant has not divulged regarding the change in the financial pronouncements.
References
Appuhami, R. and Bhuyan, M., 2015. Examining the influence of corporate governance on intellectual capital efficiency: Evidence from top service firms in Australia. Managerial Auditing Journal, 30(4/5), pp.347-372.
Carnegie, G.D. and O’Connell, B.T., 2014. A longitudinal study of the interplay of corporate collapse, accounting failure and governance change in Australia: Early 1890s to early 2000s. Critical Perspectives on Accounting, 25(6), pp.446-468.
Dion, M., Weisstub, D.N. and Richet, J.L. eds., 2016. Financial Crimes: Psychological, Technological, and Ethical Issues (Vol. 68). Springer.
Ferrell, O.C. and Fraedrich, J., 2015. Business ethics: Ethical decision making & cases. Nelson Education.
Garegnani, G.M., Merlotti, E.P. and Russo, A., 2015. Scoring firms’ codes of ethics: an explorative study of quality drivers. Journal of Business Ethics, 126(4), pp.541-557.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB 116 non-current asset measurement models. International Journal of Critical Accounting, 6(5-6), pp.509-519.
Mascalzoni, D. ed., 2015. Ethics, Law and Governance of Biobanking: National, European and International Approaches(Vol. 14). Springer.
Miglani, S., Ahmed, K. and Henry, D., 2015. Voluntary corporate governance structure and financial distress: Evidence from Australia. Journal of Contemporary Accounting & Economics, 11(1), pp.18-30.
Othman, Z. and Rahman, R.A., 2014. Attributes of ethical leadership in leading good governance. International Journal of Business and Society, 15(2), p.359.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
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