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ACC701 Financial Accounting Proof Reading Service
Facts of the case
1. Cocoa ltd a large departmental store utilised straight line method of charging depreciation.
2. There was a prediction of high profits in the year of 2016 and 2017
3. Subsequent forecast of fall in business profits in 2018 and 2019
4. There is a situation in which Max, General Manager of the Cocoa ltd forced business accountant Andrea Andy to reduce the level of profits for the year with high returns and transfer it to the years with low return.
5. Andrea with the fear of job loss unethically changes the method of calculating depreciation in the books of account from straight line method to sum of years digit method to charge depreciation with higher impact in the present period and lowering the same in the later years. Even there is no disclosure has been made by the accountant in notes to account of the financial statement of the Cocoa ltd.
Relevant applicable law and standards
As per relevant accounting standard AASB 116 for PPE (plant property & equipment) proper accounting calculation for fixed asset and amortised depreciation has to be made accordingly. As per this standard and generally accepted accounting guideline a business must continue to follow the accounting policy as that was taken in the previous year accounting statements (AASB, 2014).
As per AASB 116 and while taking reference from AASB 108 a proper disclosure has to be made in the financial statements if the effect of change in policy has its impact on current financial statements or the future prospective accounting and financial business records. In case of PPE any changes with regards to change in depreciation rate, change in method for calculating depreciation, change in useful life or revaluation of fixed asset should be properly accounted and disclosed in the notes to account. As per the relevant standard and change in method of calculating depreciation, there must be retrospective revision of depreciation calculation and must be accounted and taxed accordingly (AASB, 2014).
In the appropriate notes to accounts followed by profit & loss and other financial statements of business organisation a disclosure must be made for the following aspect related to PPE. These are
1. Rate of depreciation and amount of accumulated depreciation.
2. Method utilised for calculating depreciation ( if there is any change in policy or method for calculating depreciation, relevant information about the reasons and impacts of the change must be mentioned)
3. If there exists any revaluation of fixed asset during the period, the effective date for revaluation along with valuer report must be disclosed in the financial statement notes to accounts section
Business ethics and governance
Business ethics- According to Goel (2014), Ethics is study of moral values of an individual’s which distinguish the difference between what is wrong and what is right. Business ethics refers to application of fair business rules and principles in the various fields of organisation. Current business environment is full of competition. The race of getting ahead of business rivals and utilising the philosophy of winning at all costs divert the business managers to go for an unethical means of financial accounting. Business ethics helps in governing the conducts of business in a correct manner to avoid creation of unjust advantage. There should be a sense of integrity from the management part to protect the interest of its various stakeholders. Accounting rules and laws in form of various standards and other business requirement should be strictly followed and implement in the accounting and financial statements. There should be complete independence given to the people whose job is to furnish and preparation of accounting records for the external parties. Independence in working of accounting professional is mandatorily required by accounting and auditing norms such that accounting and financial information provided by such professional is not bias in nature. Ethics defines the code of conducts for the accounting and finance professionals that acted as guidelines for restricting unethical practices in business organisation. It always gives a reminder to the employees of the organisation that the company is committed in meeting its set planned standards.
Governance –Taking reference from Connelly (2010), it means managing business desired activities in proper format and manner. Following various laws, regulation and compliance governed by different laws of the land. The focus of business manager is to improve the good governance in the organisation by implementing best available international practices. As per Mulili & Wong (2011), along with placement of good governance structure in a business organisation its conformance is required. The motive of above activity is to evaluate and monitor the adaptability of set standards. This helped the business organisation in calculating the business
Ethical issues involved in present scenario
Various professional bodies have prescribed various ethical codes in form of accounting standards to guide the behaviour and pattern of presentation of accounting and financial statements. Integrity in the corporate ethics related to the truthfulness of the organisations actions or policies. In the present scenario of Max, general manager of Cocoa ltd forced the business accountant to misappropriate the balance sheet figures. Accordingly to the data extracted from various external research agencies the major accounting scandals were due to frauds and errors in the reporting of financial statements. The following are the major observation analysed from the current scenario
1. Not disclosing the change in depreciation calculation methods in annual reports
2. Effect of accounting change along with its revision calculations are not taken into account
3. Misappropriation of future accounting profits.
Effect on business Stakeholders in the present scenario
Any unethical activity conducted by the business will have a deep impact on the stakeholders of the business organisation. Decline in business norms and not following the generally accepted accounting and financial practises will not only puts an adverse affect on stakeholders but can also put an impact on the going concern of the enterprise. The internal policy of the organisation should be such that there is no scope of organisational and accounting gaps. Stakeholders are individuals or group of individuals which affect or are affected by the organisations course of actions, its change in policies or long term goals and objectives of the organisations. The following below mentioned table detailed out the list of various business stakeholders and impact on them due to various ethical issues in the accounting records of the organisation are detailed below-
Stakeholders in case study of Cocoa ltd
Stakeholders role in relevant business organisation
Impact of unethical accounting issue on these stakeholders
Shareholders of Cocoa ltd
Shareholders play a crucial role in the standing of business organisation. They infuse the blood i.e. provides initial capital assistance to the organisation. Shareholder are interested in checking out profitability or return on their capital invested by them (Harrison & Wicks, 2013).
Profits of Cocoa ltd is misappropriated over the period of time. This not only puts a impact on the share prices but also puts a effect on the dividend position of shareholders
Taking advantages from the loopholes of current legislative systems business managers sometimes takes unjust advantage while making defaults in presenting business accounts. Government as a stakeholder is interested in activities of business due to revenue earned from business dues to various taxation laws. Government is also focused on laws of land to be followed by business organisation or not as future of various employees is associated with company
Government is a massive institution with long arms. Will result in reduction of taxation revenue as profits for the period is diverted towards the future years. Along with that if the unethical behaviour of the company comes in notice to the government authorities it will enhance the compliance and legal burden of the organisation. Managing further litigations of government is a costly process, before government stretches its long arms on the unethical approach followed by Cocoa ltd in presenting its financial statements mangers should follow the appropriate procedures in a correct manner.
Employees of Cocoa ltd
Employees are the individuals who are responsible for the fulfilment of business tasks and objectives. They are generally bounded by the contract of employment which mentioned its respective rights and duties to be performed for the business organisation. It is responsibility of the employees to create ethical business environment to rationalise favourable conditions for managing various issues. If an organisation develops a attitude of handling the problems of business in unethical manner it will become a habit of employees to behave accordingly
In the present case study of Cocoa ltd two employees were involved in unethical accounting. Primarily Mr. Max, general manager of the group and secondly Andrea Andy, accountant responsible for preparation and presentation of financial statements. Mr Max forced Andrea to misappropriate the future profits in any manner and Andrea with fear of losing job responded unethically by changing the method of calculating and presenting depreciation for the fixed assets of the organization. Without adequate follow-ups and not following proper disclosure requirement Andrea Andy enhances the vulnerability of exposing business towards legal business compliance.
Society and local community
Society and local community hers refers to the elements present in the geographical area of the firm responsible to flourish the growth and development of business organisation. Organisation depends on the society for various inputs like human resource, financial assistance and other resources. Further it provides the market for selling the product and services offered by the company. On the other hand society is also interested in the activities of business as its helps in increase in employment rate, increase in local entrepreneurship opportunities at small and medium level. For instance a coffee shop vendor operating near the premises of organisation is a stakeholder of Cocoa ltd as impact on its going concern will have a deep effect on business on vendor (Fadun, 2014).
There exists a huge level of trust and faith in the society toward the business of Cocoa ltd. This faith and trust is necessary for the business survival, existence and promotion. With the breach of trust among each other due to financial frauds and errors the business has no space and reason to exist. Due to such high level of inter dependency the management of Cocoa ltd must fulfil its responsibility towards the local community.
Financial institutions like banks and other money lending agencies from which business has taking debt are majorly interested in the financial statements of business enterprise. Lenders place position in the business in its external environment. They are concerned about the safety and security of both debt fund and interest earned on them.
As in present case reducing profit for the upcoming years and shifting the same for the future will reduce the interest coverage ratio in the upcoming period. Banks and other financial institutions are deeply concerned with level of integrity in the financial reporting systems
Suppliers are the business partners from which raw material and other resources are attained on credit or cash basis. Further suppliers are interested to enhance the revenue from the company. Any impact on the workings of the organisation will have an effect on supplier’s revenue profit model also.
Credit suppliers of Cocoa ltd are interested in ethical financial statement due to the factor that amount of credit offered to the firm will be recovered on not over the period of time. In cut short similar to the lenders position they are concerned about the funds.
Customers are the external business partners which acts as a source of income for organisation
Any legal and compliance issue faced by Cocoa ltd in future might affect its going concern. This in turn reduces the capabilities to make proper and timely supply of goods to its customers.
While observing the above case study it has been analysed that researcher has discussed a case study of Cocoa ltd. According to above observation there has been an accounting and financial frauds witnessed in the business financial statements. Accountant of the Cocoa ltd has changed the depreciation valuation method without proper intimations and disclosures. Analyst has also explained the relevant standard and procedure for making depreciation accounting and also referred the relevant disclosure requirements. General business ethics along with corporate governance is also discussed. Analyst has also referred various stakeholders associated with the business enterprise and impact of financial frauds on stakeholders was detailed in above mentioned report.
AASB, 2014, “Property, Plant and Equipment”. Available at - http://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun14_07-14.pdf
Connelly, B.L., Hoskisson, R.E., Tihanyi, L. & Certo, S.T., 2010, “Ownership as a form of corporate governance”, Journal of management studies, 47(8), Available at - http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6486.2010.00929.x/epdf
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