Describe about the Impact of Material Misstatement on Profitability for Study of Tesco PLC?
The purpose of this study is to evaluate the impact of material misstatement on organizational profitability. In this study, Tesco PLC has been chosen as the case company. The term material misstatement refers to the practice of overstating organizational profitability in financial report. According to ISA (International Standard on Auditing) 315, difference between the facts and forecasted information is known as misstatements or irregularities (Bhattacharjee, Maletta & Moreno, 2015). In case of Tesco, the company has overstated the profit by £250 million in 2013-2014 financial statement (Tesco.com 2016). This research will emphasize the specific impacts of material misstatement on profitability of Tesco PLC. This study is important to understand the importance of ISA 315 and its guidelines in order to comply with the same.
Concept of Material Misstatement
In order to understand the concept of material misstatement, it is important to discuss the concept of materiality. The term materiality refers to the accounting principle in which an organization should disclose financial records in a proper manner. The material misstatement is the difference between the actual data and the published information through the financial report. The reason behind publishing fabricated information is to influence the internal and external stakeholders (Wright, 2016). Moreover, material misstatement may happen due to low advocacy of the management. It is the responsibility of internal accountant to make and publish the financial report. On the other hand, external regulatory body is responsible for cross checking whether the provided information is true or not. Misstating the materials is not only an example of non-compliance to the guideline, but also an unethical practice.
There are different risk factors are associated with material misstatement. In case of Tesco, the company has misstated the financial documents in order to earn short-term profitability. However, this particular strategy of the company goes negative. Therefore, shareholders of the company were deprived during the return period. It has affected brand image of the company negatively. The company has boosted the profitability by showing increased profitability by £250 million. It has influenced the investors to increase their investment in order to make profit. However, the discloser of material misstatement has affected the share price of the company negatively (Flood, 2016). Material misstatement has wide impact on the internal control of an organization. In this era of competition, companies are implementing efficient strategies in order to attract both internal and external stakeholders. The literature review shows that unethical approaches have been identified in order to influence the stakeholders. However, this particular approach has negative impact on organizational profitability (Xu, 2015). Moreover, not complying with the ISA guideline can cause legal issues, which may hamper the business process of an organization.
The practice of material misstatement has negative impact on business profitability. The purpose of misstating the financial data is to influence the stakeholders to stick to the company for long-term purpose. However, discloser of this kind of practice has negative impact on the stakeholders’ perception about the company (Bai, 2016). Therefore, it affects long-term business opportunity for the company. Moreover, providing fabricated information through the financial report can influence legal issues due to non-compliance with the legal guidelines.
Following are the research questions
What are the factors that tend an organization to misstate in financial report?
What are the processes of material misstatement detection?
What are the probable risk factors of material misstatement?
In this study, the aim is to identify the impact of material misstatement on organizational profitability of Tesco. Therefore, the data collection will be done by targeting accounting team and finance manager of the company. There are two kinds of data collection methods such as primary and secondary (Smith, 2015). In primary data collection process, data can be gathered through survey and interview process. On the other hand, in secondary research, data can be collection through observing authentic sources such as journals, press release and website. The process of secondary data collection is time consuming and it would increase the overall research budget (Flick, 2015). On the other hand, primary data collection would help to directly communication with the respective authorities of Tesco PLC. Therefore, primary data collection method will be selected in this study.
Sampling helps to select a group of people for conducting the data collection process. In order to gather appropriate data, it is highly important to select the most appropriate population from the targeted company (Hartas 2015). There are two kinds of sampling techniques such as probability and non-probability sampling. Through probability sampling, population can be selected randomly. In this study, probability sampling will be selected in order to select survey respondents from the accounting team (Katz, 2015). On the other hand, non-probability sampling technique will be selected in order to select interview respondents from the finance manager team of Tesco PLC.
In this study, 50 employees and 5 managers of Tesco PLC have been selected as the sample. 50 employees will be selected randomly from the accounts team of the company. The managers will be selected in order to conduct the interview session. Through these sample size, it will be possible to conduct both survey and interview session. The reason behind selecting 50 survey respondents is to improve the quality of gathered information in survey session. Targeting large sample is beneficial for the study; however, it will increase time consumption of the overall study.
The survey session will be conducted online through the company website. The link of survey form will be provided to the accounts team through e-mail. The employees will be responsible for filling out the forms and revert it back to the sender. On the other hand, the interview session will be conducted in office premises. The qualitative session will be a closed-door meeting in the office premises in order to maintain confidentiality of data.
In this study, data will be analyzed through efficient data analysis tools. There are various types of data analysis methods such as statistical analysis and case study analysis (Clement et al., 2015). In this study, statistical analysis will be selected in order to analyze the survey data. In this process, Microsoft Excel will be used as a tool. Mean, median, mode and standard deviation will be calculated in order to analyze the survey data. On the other hand, the qualitative data will be analyzed through close observation (McNabb, 2015). In this method, key factors of the qualitative data will be highlighted and observed. It would help to answer the research question appropriately in an effective manner.
The findings of this research would help the global organizations to understand the importance of ISA guidelines. Through this study, the contemporary organizations will be able to understand the analysis process of material misstatement. The findings will provide with a clear understanding about material misstatement. Therefore, the contemporary organizations will be able to understand the impact of material misstatement on organizational profitability. Moreover, the findings will encourage the organizations to maintain ethical business practice in an efficient manner.
In this study, the findings will be provided to the accounts team and managers of the organization. The researcher will send soft copy of the findings to the survey participants in order to communicate the result. On the other hand, hard copy documents will be provided to the higher authority of the company.
In order to conduct efficient study, it is highly important to comply with the ethical guideline. In business research, there are different ethical guidelines that help a researcher to obtain accurate research result (McCusker & Gunaydin, 2015). In this study, the researcher will comply with data protection act. The data gathered in data collection process should be kept confidential. The researcher is not allowed o disclose the data for commercial purpose. Apart from that, the researcher should not force the respondents to take part in data collection process. However, it is important to increase the response rate in order to improve the quality of research outcome (Bryman & Bell, 2015). Therefore, the researcher will encourage the respondents to share their viewpoints in order to increase response rate. Moreover, the ethical guidelines will be followed in order to deal with ethical issues.
(Refer to the appendix)
Through the semesters, I have learnt a lot about applied business research. I have found that the most interesting learning about this subject is selecting the research methods. I have learnt that in order to select appropriate methodologies, it is highly important to understand the research topic appropriately. Moreover, I have understood the potential ethical factors that could arise during the research. The challenging part of applied business research is literature review. In this section, it is difficult to investigate information about the topic. It is time consuming and costly as well. Therefore, as a student, it has been difficult for me to conduct a vast literature review about the research issues.
In business research, the difficulties occur due to authorization for data collection. The targeted company may not give permission to the researcher for gathering research data. However, in order to conduct the research, it is highly important to communicate with the relevant respondents. Therefore, students may find research difficult and overwhelming.
Bai, G. (2016). The role of account subjectivity and risk of material misstatement on auditors’ internal audit reliance judgments. Accounting Horizons, 30(2), 225-238
Bhattacharjee, S., Maletta, M. J., & Moreno, K. K. (2015). The Role of Account Subjectivity and Risk of Material Misstatement on Auditors’ Internal Audit Reliance Judgments. Accounting Horizons, 30(2), 225-238
Bryman, A. & Bell, E., (2015). Business research methods. Oxford University Press, USA
Clement, S., Schauman, O., Graham, T., Maggioni, F., Evans-Lacko, S., Bezborodovs, N., Morgan, C., Rüsch, N., Brown, J.S.L. & Thornicroft, G., (2015). What is the impact of mental health-related stigma on help-seeking? A systematic review of quantitative and qualitative studies. Psychological medicine, 45(01), pp.11-27
Flick, U., (2015). Introducing research methodology: A beginner’s guide to doing a research project. Sage
Flood, J. M. (2016). AUâ€ÂC 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement. Wiley Practitioner’s Guide to GAAS 2015: Covering all SASs, SSAEs, SSARSs, PCAOB Auditing Standards, and Interpretations, 91-117
Hartas, D. ed., (2015). Educational research and inquiry: Qualitative and quantitative approaches. Bloomsbury Publishing
Katz, J., (2015). A theory of qualitative methodology: The social system of analytic fieldwork. Méthod (e) s: African Review of Social Sciences Methodology, 1(1-2), pp.131-146
McCusker, K. & Gunaydin, S., (2015). Research using qualitative, quantitative or mixed methods and choice based on the research. Perfusion,30(7), pp.537-542
McNabb, D.E., (2015). Research methods for political science: Quantitative and qualitative methods. Routledge
Smith, J.A. ed., (2015). Qualitative psychology: A practical guide to research methods. Sage
Tesco | Online Groceries, Homeware, Electricals & Clothing. (2016). Tesco.com. Retrieved 5 October 2016, from https://www.tesco.com
Wright, W. F. (2016). Client business models, process business risks and the risk of material misstatement of revenue. Accounting, Organizations and Society, 48, 43-55
Xu, W. (2015). Research and Analysis of Material Misstatement Risks of Financial Statement
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