1. In the given question, it has been asked by the CEO of the company to choose one of the recent accounting articles and give the related deeper theoretical understanding of the same such that it brings out the entire idea, the issue and the resolution of the same. For this purpose, the news article chosen is titled “Rulemaking gives auditors a chance to provide more insight” by Ken Tysiac which talks on the work done by the accountants and the auditors being inspected by the others for the validity and completeness of the audits being done and how rule making will help the auditor. There was a huge hit to the reputation of one of the Big 4 firms KPMG, when it fired five of its partners and one of the employees on grounds of integrity issue.
The article was published on 28th August,2017 (Tysiac, 2017). One of them was the head of the Audit function in the US and they were charged on account of the unethical behavior. KPMG has been under the scrutiny in the last 3-4 years for all the bad reasons post the scandalous scarred audit of Wells Fargo and then also being involved in the audit of FIFA, the governing body of football across the world (Mahapatra, Levental, & Narasimhan, 2017). The firm’s policies and procedures being undertaken during the audit is under the scrutiny. In both the above cases of clients, KPMG has failed to mark any of the deviations or misstatements in the past years however, the latest breach in the regulations raised a doubt on all the public company auditors on integrity issues (Kohtamäki, 2017).
The employee and the partner was fired as they came to know of the audits and the samples which would be raised for inspection by the Public company Accountants Oversight Board, the one which was established to check on the auditing companies and their ways after the scandal at Enron. During such an inspection by the PCAOB, the regulators and the inspectors do their analysis and work in a way to find out the efficiency and the skills and auditing techniques and procedures being used by the audit firm in the audit of the company (Meroño-Cerdán, Lopez-Nicolas, & Molina-Castillo, 2017). They usually select the completed audit. The only objective of this is to see compliance with auditing rules and regulations and to give a reasonable assurance to the users of the audit report a confidence on the quality of the reports being issued. The leaked information on the selection of the sample came to the notice of the one of the employees of the firm through the sources of PCAOB and he let the partners of the firm know about the same in advance instead of reporting it to the PCAOB itself for integrity issues. This advance notice to the partners of the KPMG lead them to reverify the audit workings done for that particular client and to let make the audit working papers squeaky clean for the target audit by PCAOB (kabir, Rahman, & Su, 2017).
Officials from KPMG say that they reported the issue to the regulator and the Securities and Exchange Commission (SEC) once they came to know of it and also acknowledged the fact that this would undermine the integrity of the entire checking process of the regulatory authorities. The public relying on the results and reports being issued by the auditing firms wants what all information was leaked and how it affected the inspections, if any or also a revised audit to be done of KPMG in the circumstances of the case. KPMG has had a good reason to arouse fears in the minds of its regulators from the results of the past. It has had 54% irregularity and deficiency in 2014. This proves that the audit report published is highly unreliable. This rate decreased to 38% in 2015 which is an improvement over the past year but yet proves to be worse as compared to the other three of the Big 4 accounting and auditing firms.
The proper and viable response to shed away the fear in the minds of the regulators is to improve the quality of the audit and not to succumb to the ways of cheating on the samples and changing the work papers or making it error proof for the sake of getting a good score on the same. After all this happened, KPMG has no other option but to fire all those 5 partners and the employee who were involved in this malafide intentions of corruption and giving the wrong picture to the general public at large. The regulator also had no option but to give a complete view of what happened, why all this happened, during which period and what all were the audits affected due to it (Meroño-Cerdán, Lopez-Nicolas, & Molina-Castillo, 2017). Good and clean audits giving a faithful representation of the books of account of the entities are like bed rocks on which the users of financial statements can rely and they result in producing fair and transparent results and financial markets. All this has proved that KPMG is at the bottom four of the pack of Big 4 in terms of the quality of the services delivered but the other 3 are also not lagging behind as they also have fairly disturbing and alarming deficiency rates. The Public Company Accounting Oversight Board which was formed to fix this issue needs to take stern steps in order to ensure the integrity of both, its own as well as its member firms and as a result ensuring the integrity of the financial markets as well.
The issue of integrity and the policies and procedures and the techniques being used by the auditing firm while doing the audit of the client should be uniform ensuring greater transparency in the process. Further in order to curtail the integrity issues on the leakage of the private data on what all will be the samples to be chosen by the Board there should be a sub-committee within the PCAOB which will increase the frequency of the peer audit and form small groups where the confidentiality of the information can be ensured (Mayntz, 2017). The public at large depends a great deal and infact totally on the reports being given by the auditing firms on the client’s business at year end. In case the quality of the same itself is not upto the mark and contains material misstatements and deficiencies being not highlighted at the right time, this may result in the wrong picture of the financial markets and the public will suffer at large when the balloon bursts as we have seen in the past in the case of Enron scandal. Further more, the auditing firms need to take responsibility of not coming under undue pressure of the clients and other companies in the wake of old working relationships and audit fees. They should be crystal clear in their intent and in case of any such integrity issues, must report the same immediately to the respective accounting bodies, the company’s boards and also the PCAOB such that the corrective and remedial actions can be taken against such a company (Dowding, 2017). Moreover, not only on the company, but the issue of integrity relies equally amongst the big 4 audit firms and any such breach should be punished highly with the ban on the practice of the accountants and auditors who do so. The PCAOB has to come up with some of the stern steps to ensure that the quality of the audit increases and deficiency rate can be dropped to single digits and further zero by also putting a restriction on the number of clientele that can be managed by a single partner and also a limit on the number of audits being done in a particular year. This will ensure the quality to be increased by the auditing firms. Further, there should be an action plan and the punishment in terms of fine and banning from audit for a couple of years in case any person is found guilty of breach of the audit quality and misstatements being covered even though the same is in notice and evident on the prima facie view (J, 2016).
From the above accounting news which has been under scrutiny in many forms over the last many years, it can be concluded that the quality of audit needs an immediate upscaling which can not only be done by doing the audit of the auditing firm by the Public Company Accounting Oversight Board but bringing in new measures which will tighten the screws and the regulatory needs. Moreover, it is the big 4 accountants and auditors who need to understand the long term impact of all the reports they publish on the financial markets, the decision of the investors and the future of the companies. There have been many dummy companies which are still thriving in the system only because of the support being lent by the auditing firms who need to expose them through the financial statement and audit opinion so that the respectability and integrity in the profession as well as the faith on the accountants by the general public can be restored (Goldmann, 2016).
2 The new ED on IAS 8 has been launched to make certain changes in the accounting policies and accounting estimates. It will be helpful for the companies for making changes in the accounting policy and accounting estimates. The main requirement in IAS 8 is how the companies should present the various changes in their accounting estimates, and different types of accounting changes in their financial statements. As per the thumb rules, it is said that the changes in the accounting policies must be applied by the companies on an retrospective basis and the changes in the accounting estimates must be applied on a prospective basis. It sometimes becomes very difficult for the companies to make the necessary distinction between the accounting estimates and accounting policies. The companies are not able to understand the difference between an estimate and a policy; this is where the problem arrives. Thus it was requested to the authorities to provide proper clarification on how the companies can make the necessary distinction that can help them in the long run while taking important decisions while applying these changes. This is the background information on why the ED was proposed and the main points in the same has been stated here under-
The main changes that are proposed in this exposure draft are focused on three areas mainly-
Establishment of the relationship between the accounting estimates and accounting policies.
The board has proposed to make the definition of the accounting policies more clearer by removing the terms ‘conventions’ and ‘rules’ from the same, as it is not used anywhere else in the IFRSs and will help in giving a better understanding to the users. Also the board has proposed to use the word ‘measurement bases’ instead of the word ‘bases’ to make the definition more clear. The ED also proposed the need for a definition of an accounting estimate and has also stated one. Previously there was no definition of accounting estimates, by the present definition the board has made it clear that the accounting policies are the objectives that the company has to achieve and the accounting estimates are that objectives that might help the company to do the same. If we go by definition, accounting estimates are the judgments or the assumptions that the companies can make while applying the accounting policies to make sure that they are presenting a fair picture of the accounting statements of the company.
Selection of an estimation technique
As per the Ed if the company is not able to make a proper valuation of any particular item and is making certain changes in the overall assumptions or the techniques then that will also be considered as an accounting estimate and not an accounting policy. The company is making changes in the said policies or the methods to achieve a particular value of the desired objective. Hence it will be considered as an accounting estimate and will be applied prospectively. This has been made clear in the proposed ED in this regard.
IAS 2 valuation of inventories
The board proposed that while making a choice between any two given cost formulas, will be considered as an accounting policy and not an accounting estimates. This is because the formulas are already stated the companies are just using one over the other, there are not making any assumption or estimate. This is just choice and hence will be considered as an accounting policy and will be applied retrospectively. This is one of the most common problems that is faced by the company in this regard while making the definite choices and then applying the same.
These are the overview of the changes that has been proposed by the said Exposure draft in this regard and it can be said that it one of the very vital changes that the authorities has proposed. The companies often find a lot of difficulty while preparing their accounts and making the necessary changes and in the long run it becomes very confusing for them. The companies often use to apply an accounting policy change prospectively and vice versa. Thus the companies often had to make amendments in their statements after the authorities would tell them that there is fault in their statements. These were the ways by which the companies often led to falsification of the accounts on an unintended basis. Hence there was a very vital need for the authorities to propose this exposure draft in this regard so that the companies can get a basis on which they can place their important decisions and that will also help them in presenting a financial statement that is free from all kind of errors and issues. This is very important for the companies to understand the accounting related terms, hence it is the duty of the authorities to propose the required changes in that regard and make all the information clear and price.
The public demand theory and its relevance to the standard
The public demand theory states that the government must take such actions that are useful in solving the issues that the general public faces and also abolish all the inequalities and inconsistency from the system. In the given case the proposed standard has been amended to help the general public who are facing a lot of difficulties while applying the concept of accounting estimates and accounting policies in their financial statements (Buchanan, Cao, Liljeblom, & Weihrich, 2017). There was no clear definition beforehand that could have provided an insight to the companies on their application of the said terms. With the given exposure draft the authorities have tried to change the overall scenario by providing proper definition to the companies and making the differences between the accounting policies and accounting assumptions clear so that the companies can understand the same. It is help in abolishing the differences in the system and has provided proper guidance to the public and have satisfied their demands. Hence this exposure draft can be said to be aligned with the principles of public demand theory. The demands of the public will be satisfied with the actions of the authorities in this regard (Das, 2017).
On verifying the various comment letters on the exposure draft we come across two comments that are most prominent. An accounting professional Mr Christopher states that the Paragraph 32A and 32B are not consistent with each other. The comment highlights that selection of any costing method for the valuation of the inventories will amount to an accounting estimate and not an accounting policy as stated by the draft. It also specifies that the selection of method of cost valuation either FIFO or LIFO must be considered as a method of accounting estimate and not an accounting policy (Fay & Negangard, 2017). Thus the comment says that the professional is not in agreement with the proposed changes in the exposure draft. Another comment is from Segun Adebiyi that states that the method of calculation of inventory valuation as per the FIFO must be considered as an accounting policy and not an accounting estimate. Thus we see that both the comments are opposite to each other. It depends on the perception of the users on how they judge the overall valuation methods and the difference between the said accounting policies and standards (Anginer & Kunt, 2014).
On application of the various theories to the comment letters it can be said that the best theory that suits this comments on these exposure drafts is in sync with the public demand theory, that states that the authorities are taking actions in order to remove the inequalities and in discrepancies from the system. It will thus help in satisfying the demands of the general public and also help them in taking important decision. Thus the comments of the professionals or the users on these statements are in sync with the given public theory. The other theories like private interest states that the people who are in power and who have the authorities takes important decisions that are related to their own self worth and self growth. But the proposed standard by the officials is not in line with this theory of private interest. It is solely taken to provide an insight to the public that can help them in taking important decisions.
Overall after the entire analysis and studying all the comments can be said that the exposure draft will be helpful to the public in the long run. It will help them in making proper differentiation between the various concepts of accounting that will help them in preparing their reports in a more better way.
Anginer, D., & Kunt, A. (2014). Has the global banking system become more fragile over time? Journal of Financial Stability, 13, 202-213.
Buchanan, B., Cao, C., Liljeblom, E., & Weihrich, S. (2017). Taxation and Dividend Policy: The Muting Effect of Agency Issues and Shareholder Conflicts. Journal of Corporate Finance, 42, 179-197.
Das, P. (2017). Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), 10-17.
Dowding, K. (2017). Australian exceptionalism reconsidered. Australian journal of Political Science, 52(2), 165-182.
Fay, R., & Negangard, E. (2017). Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, 38, 37-49.
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4, 103-112.
J, G. (2016). Principles of Australian Contract Law. Australia: Lexis Nexis.
kabir, H., Rahman, A., & Su, L. (2017). The Association between Goodwill Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia. 8th Conference on Financial Markets and Corporate Governance (FMCG) 2017, 1-32.
Kohtamäki, M. (2017). Real-time Strategy and Business Intelligence: Digitizing Practices and Systems. Finland: Palgrave Macmillan.
Mahapatra, S., Levental, S., & Narasimhan, R. (2017). Market price uncertainty, risk aversion and procurement: Combining contracts and open market sourcing alternatives. International Journal of Production Economics, 34-51.
Mayntz, R. (2017). Networked Governance. Springer.
Meroño-Cerdán, A., Lopez-Nicolas, C., & Molina-Castillo, F. (2017). Risk aversion, innovation and performance in family firms. Economics of Innovation and new technology, 1-15.
Tysiac, K. (2017). Rulemaking gives auditors a chance to provide more insight. Journal of Accountancy.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download