Define stake holders in this case?
According to APES 110 code of ethics for professional accountants, does Juliette as the engagement partner of Positive Accounting Solutions has the responsibility to negotiate with Global contractors and explain to them that it is wrong for the firm to represent wrong financial statements?…explain………….
QUESTION 1; ANSWER
The stakeholders in this case are the Positive Accounting Solutions’ partners; Katrina who is the engagement partner and Juliette Forbes who is the management partner of the office. Being partners they hold a large percentage of interests in the firm. The other stakeholder in the case study is the CEO Global contractors; James Habert; this is the biggest client of Positive Accounting Solutions firm. The expectations of Katrina Richards and Juliette Forbes are to keep their biggest clients into the engagement with the business at the same time conforming to the laid down rules and principles. In so doing they have to secure a contract with Global contractors in that, they must portray Global’s good financial statement in securing a credit of $ 5 000000 from the bank in the next quarter. On the other hand, the CEO of Global contractors James Habert is more interested in giving out the contract to positive Accounting Solutions firm to approve their financial statements. But they have to reclassify their marketable securities or else the engagement will be put up for bid if they fail to comply.
In reference to Forbes statement, Global contractor firm is their biggest contractor which has the implication that, they have had a very long business association with the firm. According to Accounting Principles and Ethical standards section 300.11, it is unethical to have familiarity for a member business as this influences the decision making process. Hence the Positive Accounting Solutions and Global are violating the ethical standards in their business dealings. Besides, being dominant personalities in the Positive Accounting Solutions, Richards and Greg are influencing the decision making process in the firm in violations of Accounting Principles and Ethical Standards section 300.12. Since they make the last final decisions on difficult accounting issues particularly where a difference of opinion with the client is needed, they have chosen to go along with the demands that their marketable securities be reclassified (APESB, 2010).
Positive Accounting Solutions have the obligations to prepare and report the financial information and present them according to the standards stipulated by the international ethics standards Board for accountants which were issued in July 2009. The information must be presented in a fair and honest manner in compliance with the required professional standards. The firm must exercise independence with the clients to avoid compromising with the financial statements presentations. The Global contractors company has reclassified a $ 2000000 market loss on their trading investments which is a misrepresentation but Positive Accounting Solutions is expected to overlook this idea and purport the financial statements as true and fair. It will be unethical for such course of action by the Positive Accounting Solutions, having the knowledge that if such changes are not made, then Global contractors’ security price will hit the rock. However, Juliette is on the stand no justification at all exist as to warranty the change in the reclassification from the trading to available for sale. If the company chooses to compromise due to their long term relationship, then it will mean ethical standards are being violated by both parties. This action could result into serious repercussion for both the client; Global Contractors and the auditing firm Positive Accounting Solutions. Richard and Greg who are going along with the client’s decision must also understand the consequences of their actions. This is because they are charged with the responsibilities of making final judgments on complex accounting issues which need a difference of view with the client.
QUESTION 2; ANSWER
According to APES 110 code of ethics for professional accountants, Juliette as the engagement partner of Positive Accounting Solutions has the responsibility to negotiate with Global contractors and explain to them that it is wrong for the firm to represent wrong financial statements. Juliette has the information of the company’s intentions to acquire a loan of $ 5000000 and that the company has reclassified a $ 2000000 market loss on their trading investment to the available for sale classification. They intend to deceive the bank that the loss is in the stockholders’ equity and not actually a charge in the current income. Juliette also is aware that the result of this reclassification will make the earnings in 2010 to be higher by 8 % of which to the contrary the earnings would have gone down by 2 % hence their stock price would go down. With all these facts Juliette has to use AUST section 320.2 to make sure that the financial statements are presented in accordance with the stipulated reporting standards of financial statements. In case Juliette is not satisfied with such arrangements she should notify all those mandated with the accountability of Governance and put the communication on record. Juliette must also take considerable actions to maintain the information in a manner to give the correct picture of the nature of all the business activities and how they purport to be in reality (APESB, 2010).
Richard and Greg on the other hand, have the respect and responsibility of offering final decisions or judgments concerning complex accounting issues in circumstances that require a view with the customer. They are all certified public accountants hence needed to conform to the requirements of accounting principles. In this scenario, the two have already made a decision to go along with industrial. Being CPAs they should be aware of the consequences of their own doings. First, they have taken the advantage of long term relations they have with Global contractors to influence the decisions. This is a violation of section 300.12. Just because Global contractors are their biggest client should not be a reason to approve their financial statements and misrepresent the information thereof (APESB, 2010).
Besides, Global contractors make use of intimidation where they threaten to put the engagement for bid if Positive Accounting Solutions refuse to move along with the reclassification of marketable securities. In so doing, they are violating section 300.7. The threats in this case are of self interest, familiarity and intimidation. This must be understood by Richard and Greg that making decisions that are unethical in relation to threats and intimidation is contravening their reputation as members of certified public accountants. Moreover, being part of the employees of Positive Accounting Solutions the four parties must Act in accordance with standards to uphold the institution’s image. If the four decide to move along with Global contractor’s method of reclassifying securities, it implies that the generally accepted accounting principles will be violated. Furthermore, the audit engagements between the Positive Accounting Solutions and the Global Contractors must be independent. This includes terms, the teams and the network firm must be independent to avoid placing the banks at risk of a possible default due to misrepresentation of financial statements. Failure to adhere to this, it’s a contravening to the conceptual framework of Australian accounting standards. The firm might be in serious trouble incase of a possible default just as the case with Enron failure in United States which was caused by misrepresentation of financial statements by their auditors; Anderson (Whittington et al., 2002).
QUESTION 3; ANSWER
The role of auditor virtue in establishing the course of action to take in this case must despite the personal consequences perform their professional obligation. Even if there is a possibility of losing a major client in disagreement concerning fair presentation of client’s financial statement position. According to section 100 of the APES 110 code of Ethics for professional accountants the virtuous auditor must establish the possible threats which hinder conformity with the fundamental principles, then assess the importance of the threats and make use of safeguards to reduce the threats to an acceptable level of eliminate them completely. In carrying out this course of action, the auditor must exercise professional judgment in the theoretical structure. A virtuous auditor will employ integrity by being truthful and straightforward. For example, in the case of Juliette, she has clearly stated that validation does exist under the generally accepted accounting principles as to modifying the classification of marketable securities from trading to available for sale. This is an act of being honest with the CEO of Global contractors whether he likes it or not, the auditor must stand by it (APESB, 2010).
Moreover, the auditor must not permit any bias regardless of the client being among their major clients. The familiarity must not influence the auditor to over crown the professional standards and business judgment. The auditor must not be deterred even if it means losing the client. In case the relationship with the client is unduly biased and may influence the auditor’s expert judgment in accordance with the service being provided, the virtuous auditor must simply terminate the relationship. This would be the best decisions to avoid any further damage to the career and profession at hand. Professional care must be exercised despite the threats that failure to sing the tune of Global contractors the contract will be reassigned.
Positive accounting solutions name will be at stake if it follows that, the audited reports resulted into a huge default within the bank. The auditor must stand firm to protect the laws and regulations to avoid behaviors that may greatly discredit the expertise in auditing profession. Nevertheless, in case the client puts up the contract on a bid as a consequence of not compromising, the auditor must exercise confidentiality of the facts gathered from the client. The information must not be disclosed to any outside party without any tangible authority less there are legal or professional mandate that warranties the release of the information. The Virtuous auditor must at all times comply with section 110, 120, 130, 140 and 150. What’s’ more the auditor must however, be confident and courageous to avoid further intimidation from the CEO of Global contractors Mr. James Habert who might do anything just to make sure that the auditor loosens on his stand about the financial statements misrepresentation (APESB, 2010).
QUESTION 4; ANSWER
The accounting rules that were adopted using the concept of outstanding mortgages received a lot of criticism as it led to the collapse of major firms in US like Lehman Brothers. The method was mark- to- market accounting in which firms were forced to undertake huge unanticipated write downs on securities. The method is also known as fair value accounting where a security or asset is valued to show its present value rather than the value at the time the asset was acquired. These write-downs were calculated at values which were excessively depressed due to the freezing of its markets hence firms were mandated to prize to dispose them at whatever price they could. Mark-to-market is highly criticized because it is pro-cyclical, that is, it moves down in the low markets and moves up in the converse markets. Besides, the method of accounting affects everyone as when one firm marks down their price the other must follow suit. Moreover, mark-to-market accounting has an instant effect overnight which may lead to abrupt collapsing of the bank as experienced in 2008 (Taylor, 2009).
For example, in the Lehman Brothers case, Sumitomo Mitsui Banking Corporation made an effort to confiscate assets pledged as collateral in a loan of $ 350 million it granted to Lehman Brothers. Mitsui attempted to cite mark-to-market accounting by claiming that the assets pledged by Lehman Brothers had been devalued and it could not hold as equity in the collateral anymore. Lehman Brothers on their part argued that such valuation was tentative rather than justifiable valuation. Hence the critics of this method called for moving towards a common system of methods of valuation, refining the standards and giving more clarity around methods in which values can be derived.
Following the criticisms there were a lot of suggestions on how to find solutions for the problem. Most economists were for the idea that the method should be suspended as it prevents firms from telling the truth about the worth of certain assets. This is because the most firms may be needed to write downs their assets. Suggestions were made about using the historical cost till a tangible solution was provided. Contrarily, Security Exchange Commission encouraged firms to adopt the method as it valued the securities correctly. Messages revolve around Financial Accounting standards number 157 valuations though illiquidity of the market and lack of price transparency and the differences in the method of used among other parties continues to create various challenges (International Accounting Standards Board, 2001). Some financial institutions would be better off if they do not write down their mortgage connected assets in their books of accounts. Besides, it is only for the risk takers who can support the accounting rule in understating the asset values to avoid litigations in the future business operation.
QUESTION 5; ANSWER
Financial reporting and procedures in accounting are affected by laws and regulations. Every country, continent or trading block has its own rules and regulations, hence this result in disparity across countries on some set of accounting standards. All investors and managers are required to be familiar with such differences in various countries. The government or political organs influences on these set of standards which in turn affect firms choice of accounting methods. In most cases the standards lead to comprising on some accounting rules which may reduce the ability to adapt to new accounting standards. As mentioned earlier, there is no single agency or body that lay down such rules hence interpretation and enforcement may be different hence disparity in compliance with foreign firms. Increase political pressure may strain the auditors’ ability to conform to the standards hence possibility of litigations (McKay, 2009).
Accounting rules must not be influenced by political pressure because every firm in a specified industry has its own types of assets of which the management would want to value differently. The idea of political pressure must not arise as it may lead to the collapse of big firms in the economy due to poor and selfish intentions of politicians. In measuring assets, intentions of the management must be considered. For instance, investments that are held to maturity and measured on the basis of its historical cost, the management has intentions that are positive to hold the asset to maturity. On the other hand, assets that are for trading purpose measured at fair value, the management has the intentions to primarily sell them at near term’ the set of standards and rules must however be complied by the management in recording the fair value of the assets (Nelson, 2003, pp. 91-104).
Alternatively, all financial assets must be measured at fair value which will eradicate the requirement for much intricacy, intention documentation and judgment of the audits implicated in the current standards. This would improve on comparability since similar assets would be identically valued regardless of what the management may view about the assets. With pressure form political organs explanations are given rather than excuses hence the absence of movement towards this resolution (Nobes, 2004).
Though rules imposed by the politicians can help in transparency of accounting issues, some of the rules that may be imposed may be based on poor principles or may lack tangible principles. Therefore application of more appropriate principles would scale down the desire for subjective and comprehensive rules. In case some rules may be done away with, there will increased transparency and information comparability.
Moreover, accounting rules must not be influenced by political pressure because politicians erode the independence of accounting standard setting procedures. Poor transparency leads to loss of confidence in investors due to reduced information quality as it is reflected in the decisions made. The most troublesome issues is in regard to governance which affects the decisions by the chairman of financial accounting standards boards hence his or her independence is limited. As a heavy moral hazard issue political pressure can have serious repercussions to the reliability and predictability in standards of accounting on a firm. For example, from a Washington post 2008, an article was posted revealing how IASB modified their rules to so that banks in Europe could make their statements of final position look better and presentable. The banks were allowed to rewrite their history, pick and choose their investments problems and value them according to their decisions. This resulted into Deutsche bank modifying their $32 billion assets that were troubled and turning their quarterly pretax loss of $970 million into $ 120 million profit. The market securities were deceived hence bidding the shares to 19%. Serious consequences were experienced as the credibility of IASB was thrown to the wind hence a serious cry world wide of immunity of accounting standards boards from political manipulation (Kessler, 2008, p.1).
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