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- QUESTION
Final Exam Essays
Here are your final exam essay questions. Exams are due by noon Monday, August 10. Please email them to me at [email protected]. I will email you back to let you know that I received your exam; give me 12 hours, but let me know if you don’t receive a reply. Remember, I am out of town on UC business until August 16, so will grade your exams asap when I return. In the meantime, you will receive an “NG” grade, which will be changed to your actual grade when I’ve completed the grading. If this is a problem, tell me so in your email; I can assign a provisional grade until my grading is completed.
You must answer the first question, below. You may choose 2 of the last 3 questions to answer. Your answers should be type-written, single-spaced, at least 500 words, but no more than 1,000 words. Refer to sources from class (videos, articles, cases, lecture, etc.) being careful to document your answers, where appropriate (I would expect 3-5 sources for each essay). You may quote references, but be sure to show the citation. (e.g. According to Art Levitt, “ blah blah blah “ (The Numbers Game, p. 4)). Also be sure you proofread your answers carefully. I will take off more points for grammatical / typographical mistakes in these final papers than I did in your weekly summaries. Please start each question on a new page, and be sure your name and the question you are answering are at the top of each page.
- (required): We discussed earnings management and fraudulent financial reporting at length in class, and we studied several videos, cases, and articles which addressed these issues as well. Distinguish between earnings management and fraudulent financial reporting, citing examples of each. Based on our discussions in class on the Treadway Commission’s findings, what are three incentives (situational pressures) which can encourage these behaviors, and what opportunities (e.g. weaknesses in internal control) are often present which allow it to happen? Again, cite examples from class for some of these.
Choose 2 of the following 3 questions to answer:
- The culture of the public accounting profession, and the regulations related to competition, have changed dramatically over the last 50 years. Summarize these changes and discuss the impact they have had on the services provided by the profession, and the challenges they have created to independent audit services. In the last 200 – 500 words of your essay, discuss whether you think these changes have had a positive or negative impact on the profession. Cite examples where appropriate.
- Why is it important for the accounting standard setting process to be neutral and unbiased? What does the Conceptual Framework have to say about this? Discuss the challenges that the FASB faces in setting standards in controversial areas, and cite examples where the perceived economic consequences have been used to try to influence, or to actually influence the standard setting process. In the last 200 – 500 words of your essay, discuss whether you believe that economic consequences should, or should not, be considered by the FASB when setting standards. Cite examples where appropriate.
- Many believe that over the counter derivatives played a role in the recent economic crisis. Discuss how the proliferation of OTC derivatives added fuel to the economic crisis, and how the deregulation of the financial services industry also played a part. Be sure to include a discussion of how “moral hazard” and “too big to fail” impacted the crisis and the government’s response to it. In the last 200 – 500 words of your essay, give your thoughts on what you learned about the crisis that you didn’t know before this class, and how your views have changed on issues like regulation, campaign finance, too big to fail, or any or the other issues that we discussed in class. Cite examples where appropriate.
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| Subject | Essay Writing | Pages | 4 | Style | APA |
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Answer
Question 1
Managers are responsible for making choices on real actions affecting earnings and accounting policies. Such choices aim at achieving pre-determined objectives by use of aggressive tactics for earnings accounting decrease or increase of profits, per share earnings or revenues. This management role is earnings management (Kieso et. al., 2012), which presents a certain level of earnings or discloses possible loopholes in standards of financial accounting. Earnings management types include inappropriate liabilities estimates and accruals, generous accounting reserves and excessive provisions, minor intentional financial reporting breaches linked with material breaches and unsuitable recognitions of revenue. It takes certain patterns such as Big Bath accounting which occurs when in one year corporations write down or write off some assets in their balance sheets. Other earning management patterns are maximization, smoothing, and minimization of a company’s total income (Kieso et al., 2012). According to Kieso et al (2012), earnings management motivators include political hypothesis costs such as lowering political heat, contractual motivations such as managing cash bonuses and debt covenants and earning expectation drivers like initial offering to public and negatively affected share prices. Deceptive earning management influences financial reports users’ perception about profitability and performance leading to financial reporting fraud.
Generally, error and fraud are the only causes of financial reports misstatements. Fraudulent financial accounting refers to preparation of financial statements with intent of misleading the public. Such misstatements include financial statements disclosures or amount omissions aimed at deceiving users of financial statements. Factors causing fraudulent reporting range from misuse of accounting principles to false transactions to distorted records. Fraudulent reporting takes the form of asset misappropriation and misstatement in financial statements and fictitious or premature revenue recording such as revenue overstatements. Understating receivable allowances, recording non-existent assets, and overstating tangible asset inventory values such as plant, property, equipment, and inventory also form part of fraudulent financial reporting (Remley & American Management Association, 2005).
Some report fraud purely result from the company’s situation. For instance, it is common for small companies to suffer cumulative fraud amounts. Secondly, most frauds overlapped in fiscal periods, which can go up to over 12 months. Another situational fraud incentive is the ability to prepare overstated revenue such as using premature and fictional revenue records and assets financial statements. Fraudulent financial reporting is prevalent in large companies with enough assets to cover up the fraud practices. In addition, fraudulent financial reporting and earning management largely depends on the control environment. For instance, the company’s top management determines its ability to produce fraudulent reports. According Elliott & Elliott (2008), findings of the Treadway Commission, show that 72% of fraudulent reporting cases involved company chief executive officers, 43% involved chief financial officers and 83% involved both or one of these parties. Another lead to fraudulent reporting is irregular meetings such as just once in a year of internal audit committee. From the Treadway findings, 25% of companies lack an audit committee while 65% of the audit committee members were either non-certified or currently out of practice (Elliott & Elliott, 2008). Finally, some company directors comprised of family affiliated individuals. This means that some people may be accorded incompatible jobs based on family ties resulting in fraud loopholes.
References
Elliott, B., & Elliott, J. (2008). Financial accounting and reporting. Harlow: Financial Times Prentice Hall.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2012). Intermediate accounting. Hoboken, NJ: Wiley.
Remley, J., & American Management Association. (2005). Make million$ selling real estate: Earning secrets of top agents. New York: AMACOM.
Question 2
In the year 2002, accounting profession suffered because of scandals, which were highly publicized (Epstein & Lee, 2007). For instance, it was discovered that the renowned Arthur Anderson audit fraudulently reported false figures about lost funds in Enron Corporation. This actually led to bankruptcy of the corporation. In the same year, Arthur Anderson firm was found culpable for attempting to obstruct justice. Because of this, they were sentenced to probation for a period of five years and were also fined $500,000.in addition, WorldCom was also found to have misappropriated funds amounting to $3.8 billion on expenses. The fraudulent reporting practice occurred in several other companies such as Tyco, Adelphia and Qwest.
According to Kirkwood & Zerbe, (2012), the impact of these scandals on the accounting profession was adverse. The practice negatively affected the public trust in accounting practice. It also brought to question how effective the self-regulatory process is and whether audit firms still had the moral standing to uphold public trust. In fact, audit firms ought to give unbiased report that will expose the strengths and weaknesses of the company. Audit firms reveal to investors whether the company is making profits or losses (Orth, 2010). The need for regulation in the accounting profession was therefore inevitable as many people suggest the need to be put in place stricter rules to safeguard the accounting practice. For instance, the Securities and Exchange Commission suggested a number of reforms such as limiting the independence of audit firms to work with big corporations.
It is proposed that the length of time key personnel worked in a given company should be reduced. Beside, regulate the services that audit firms can give companies. The congress passed these new proposals into legislation in summer 2002.the passing of Sarbanes-oxley Act was the climax of the war on fraudulent accounting reporting. It is said that this legislation is the first significant law that directly regulate the accounting practice since 1933.it is worth noting that regulations have always existed but there was need to come up with strict laws that would save the image of accounting profession (Financial Accounting Standards Board, 2009). These legislations have had immense positive impact in the accounting practice. This is because it affects the big five namely, Deloitte & Touche, KPMG, Arthur Andeson, PricewaterCoopers and Earnst and Young. Precisely put, this legislation affected all audit firms and Certified Public Accountants.
References
Epstein, M. J., & Lee, J. Y. (2007). Advances in management accounting. Amsterdam: Elsevier JAI.
Kirkwood, J. B., & Zerbe, R. O. (2012). Research in law and economics: Vol. 25. Bingley, U.K: Emerald.
Orth, J. V. (2010). Reappraisals in the law of property. Farnham, Surrey: Ashgate
Question 3
According to Williams, Carcello, & Neal, (2007), it is crucial that FASB considers economic consequences during the setting of accounting standards. Since its inception in 1973, FASB was mandated to ensure that standards were set for financial accounting and reporting. Its primary role is to remain neutral and establish standards that will not only predict cash flows but also access managerial performance. FASB statement of concept 1 is based majorly on what external users need especially because they lack authority and rely on information from the management. Standards are meant to affect earnings and in turn, the management compensation, financial ratios, debt covenants, stock price, analyst recommendation and bond ratings (Financial Accounting Standards Board, 2009). Self-serving groups have developed a lot of interest in the setting of accounting standards because of its immense impacts. However, this process has been under criticism for being biased. Ideally, this process should be free from politics. The impact of accounting reports on business, unions, governments, creditors, and investor is what is commonly referred to as economic consequences. The accounting standard process must take note of economic consequences because of its adverse impacts. According to concept 1 of FASB statement, financial reporting must provide information that will be useful to investors, stockholders, and creditors so that they can make informed decisions. It is also important to consider economic consequences of since the audience interest in financial reporting is fast growing.
References
Financial Accounting Standards Board. (2009). FASB accounting standards update. Norwalk, CT: Author.
Financial Accounting Standards Board. (2009). FASB accounting standards codification. Norwalk, CT: Financial Accounting Standards Board of the Financial Accounting Foundation.
Williams, J. R., Carcello, J. V., & Neal, T. (2007). GAAP guide level A: Restatement and analysis of current FASB standards. Chicago, IL: CCH
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