Tutorial Solution (Topic 1) PDF

Preview

Summary

Here's the tutorial solution for topic 1...

Description

ACCY305 Financial Accounting III Session 1, 2019

Tutorial Solutions Week 2 Professionalism and Ethics of Accountants

There are no short answer questions this week. Long response questions Low, M., Davey, D. and Hooper, K. (2008) “Accounting scandals, ethical dilemmas and educational challenges”, Critical Perspectives on Accounting, 19 (2), pp222-254. 1. The authors begin their article with a quote from President Theodore Roosevelt: “To educate a person in mind and not in morals is to educate a menace to society”. Discuss this statement with particular reference to accounting. Use examples to support your discussion. This requires an individual response from students, but may be a good topic for group discussion. With reference to the raft of corporate collapses and scandal, Low et al (2008, p223) note, “…behind each scandal and crisis is a possible lack of morals and educated people”. Most reasonably intelligent students can learn how to “do accounting”; ie. to make calculations, to prepare journal entries and to prepare financial statements. More senior accountants usually have the skills to interpret or analyse financial statements, or to prepare reports for management or other stakeholders. More senior accountants would hopefully have the skills to propose and analyse business decisions, ie capital budgeting decisions, investment strategies, risk analyses and so on. These are technical activities that a person can be taught to do (ie. educate in mind). However, if these types of decisions are made in a moral vacuum, there can be serious and debilitating consequences for a wide range of stakeholders. For example: 

A good financial decision for a manufacturing company might be to seek out the cheapest costs in the supply chain of a product. But, this does not take into account the people involved in that supply chain and the exploitation that they may be subject to. A good example of this is Nike (one of our later articles examines this) and how they exploited workers in developing countries to lower the costs of production of their shoes. Some of these workers were earning about $1 per day, yet Nike shoes sell for $100 plus. There are numerous YouTube clips on this issue. Another example relates to clothing manufacturers who sourced clothes from Bangladeshi “workshops” which in some instances were burnt to the ground.



A good financial decision for a resources company might be to source raw materials in developing countries with limited regulation, low cost wages and low cost production facilities. A cost of this might be to “support” the local government (ie. bribes), or even provide community facilities. However, these developments might be subject to very lax environmental, industrial relation and OHS regulations, and there may be extremely negative consequences for the local workers and the local environment. Local authorities may be corrupt and keep any financial incentives for themselves, while local citizens suffer appalling conditions.



A good financial decision for a services company may be to offshore operations, such as call centres, to low cost countries. This has an immediate effect on workers who lose their jobs, and broader impacts on the societies that they live in. The “receiving” country may have very lax industrial relations regulations and local workers may be exploited.

Page 1 of 6

ACCY305 Financial Accounting III Session 1, 2019

Tutorial Solutions Week 2 Professionalism and Ethics of Accountants



A decision to “manage earnings” or to “window dress” financial statements to “keep a lid” on financial distress might be seen as good in the short term (to avoid a collapse in share prices), but in the longer term when the financial distress becomes apparent (and it always does), the losses are significant and far reaching (eg. Enron, HIH).



A decision of a manufacturer to “cut corners”, perhaps by excluding safety features on a product, might be financially attractive in the short term, but may ultimately put peoples’ wellbeing or lives at risk. Similarly, manufacturers of demonstrably dangerous products, such as asbestos or tobacco, might ignore health warnings to increase market share and profit, with little regard for the consequences on regular people.



A good financial decision by an insurer (insurance companies, insurance arms of banks, health funds) might be to comply strictly with legal definitions of “claimable events” (to minimise payouts) with little regard for a common sense interpretations (of a heart attack, of a permanent disability, of loss). The personal cost on unsuccessful claimants and their families might be significant.



A decision to provide financial incentives to management may be effective in the short term (while the management is still in the employment of the company) but will often have negative long term consequences.

Essentially, accounting students should be encouraged to think ethically. Accounting is not only a financial practice, but also a social practice. Accountants work in a social context and our decisions always impact on people. We have enormous power to “tell the story” or to hide behind the numbers. We are supposed to be professionals, and we are supposed to act in the public interest.

2. The authors (p226) suggest that accountants have been complicit in corporate collapses. Outline the arguments to support this view.



many corporate leaders (ie. directors, CEOs, CFOs) are in fact accountants, and if the blame for corporate collapses can be placed with corporate leaders, then this blame can be placed with accountants.



in many cases, companies that have collapsed have done so after unqualified audit opinions, again the domain of professional accountants (auditors and accounting firms).



accountants have the knowledge, skills and power to disclose (or not disclose) information. Accountants tell the story (see Hines (1988)). Accountants (standard-setters) make the rules – the CF, standards and GAAP. See also arguments on page 237-238.



the authors argue that accounting is central to the capitalist economic system, more specifically the excess of the capitalist system. Young (2003 as cited in Low et al (2008, p226)) suggests that capitalism “has degenerated into arrogance, amorality and an interest only in the narrow definition of the bottom line”. A current example is reflected in the problems associated with franchising in Australia – Retail Food Group (Michel’s Patisserie, Gloria Jeans, Brumby’s), Dominos Pizza and Caltex. For decades the franchising model has worked well,

Page 2 of 6

ACCY305 Financial Accounting III Session 1, 2019

Tutorial Solutions Week 2 Professionalism and Ethics of Accountants

but more recently the companies are exploiting franchise holders by imposing unrealistic cost structures. Another example is seen in the Aged Care sector, where “business models” are imposing huge burdens on vulnerable older Australians and their families, as well as inferior care. 

The authors go on to refer to a statement made by Chambers (as cited in Clarke at al 2003), namely that “corporate accounting does not do violence to the truth occasionally and trivially, but comprehensively, systematically, and universally, annually and perennially. Further, Sikka and Willmott (2002 as cited in Low et al (2008,p227) argue that “accounting prioritizes property rights (as in a balance sheet), celebrates the supremacy of capital over labour (as in the income statement) and encourages belief in efficiency, profits and competition”. Essentially, accounting is an essential tool in the workings of the capitalist system.

3. Provide a brief summary of the five factors that Low et al (2008) identify as contributing to recurring corporate collapses.

1. Corporate transparency – many corporate collapses are often hidden / delayed by irregularities (manipulations) of financial reports. Imhoff (2003 as cited in Low et al, 2008, p228) suggests that it is not the standards per se, but rather professional accountants who have lost their way. Standards such as IFRS or US GAAP are comprehensive but complex….company leaders/accountants work with these standards to disclose (or hide) what they want to. It is suggested that the profession has lost sight of the public interest and aligned itself with commercial interests… a more lucrative role as consulting-partner to the business community. Examples – Enron and Arthur Andersen, HIH and Arthur Anderson. See pages 243/244 for more examples (EY, PWC).

2. Corporate values and behaviour – recognition that there are no “black and whites” and that “the accounting rules are not black and white”. It doesn’t matter what is written on paper, if the culture of an organisation is not right, then the behaviour of employees will not be right. Examples – Enron – win at all costs, CommBank – maximise profit (rip off customers via poor financial planning, exorbitant fees, strict adherence to insurance classifications), Westpac and ANZ – interest rate rigging….the list goes on. 3. Money culture - we live in a society that determines the value of things in monetary terms. What used to be a medium of exchange has usurped the place of fundamental values (p232). Soros (1998 as cited in Low et al (2008, p232)) “What I can say with confidence is that the substitution of monetary values for all other values is pushing society toward a dangerous disequilibrium and suppressing human aspirations that deserve to be considered as seriously as the growth of GNP…Profit maximizing behaviour follows the dictates of expediency and ignores the demands of morality…We must have a sense of what is right and what is wrong, an inner light that guides our behaviour as citizens and politicians”. The authors go on to say that what is happening in our society today is that our sense of right and wrong is endangered by our preoccupation with success being measured by money. Example – an executive in a publicly listed company is worth more / is more successful than a nurse, teacher, aged-care

Page 3 of 6

ACCY305 Financial Accounting III Session 1, 2019

Tutorial Solutions Week 2 Professionalism and Ethics of Accountants

provider, police officer etc. Universities have become profit making ventures (customers, product, measurable outcomes etc) rather than providers of education. 4. Vices of a capitalistic society – we are in a never-ending cycle of corporate and accounting collapse and regulatory reform. However, the authors argue that regulation will not solve the problem…we need to re-establish a culture of integrity in business dealings. Kammler (as cited in Low et al, 2008, p233)) suggests that the 5 of the seven deadly sins of Christianity – pride, envy, greed, avarice and lust – have been transformed into positive virtues and necessary in business. The two cardinal virtues – love and humility – are rejected as bad for business. Governments have driven the privatisation agenda of essential services (electricity, water, communications), and the authors ask: where is the notion of commonwealth, civic and fairness from these companies. Example – privatisation of electricity infrastructure in NSW – massive increases in costs, extremely negative consequences for the less advantaged in the community. Corporate executives are “paid” well to do what they do – they should produce a return to the shareholders, and governments and society will take care of the rest. It is what business schools teach them to do. 5. Legalistic culture – the idea that the law can be interpreted to meet the needs of a company… that if the law does not specifically say that something can’t be done then it is ok to do it. An example of this is the acceptance these days of “tax minimisation” – that is, working within national and international tax laws to pay as little tax as possible. It is no coincidence that today’s corporate scandals have been centred in a county with a very legalistic culture (ie US). There have been strong arguments that the US is too legalistic, and that corporate reporting would be better served by a framework such as IFRS which is principles-based rather than rules-based.

4. McPhail (2001, as cited in Low et al (2008, p237)) suggests that one of the main goals of accounting education should be to encourage students to recognise the broader social and political context within which their profession practices. Do you agree with this view? Why or why not? This requires a personal response, but from the paper…  Educators have a responsibility to develop well rounded students, who are sensitive to the importance of values, as well as techniques, who are aware of the responsibilities of leadership as well as the tasks of management, and who are capable of confronting the longterm ethical dilemmas involved in their businesses as well as the short term pressures of the financial bottom line (Woldring, 1996 as cited in Low et al, 2008, p237).  Accounting choices are moral choices… accounting can change the world and can influence the lived experiences of people, so we need to humanise accounting students.  AACSB accreditation – encourage students to understand the myriad challenges surrounding corporate responsibility and corporate governance; provide them with the tools for recognising and responding to ethical issues, both personally and organisationally; engage them at an individual level through analysis of both positive and negative examples of everyday conduct in business (p238) Note though that the players in Enron came from good business schools, but they put personal gain over the interests of other stakeholders (p238).

Page 4 of 6

ACCY305 Financial Accounting III Session 1, 2019

Tutorial Solutions Week 2 Professionalism and Ethics of Accountants

5. Hines (1988) presents the idea that accounting is socially constructed and socially constructing. Explore this idea with reference to examples. Accounting is socially constructed: accounting and financial reporting are constructed by accountants and regulators. We make the rules, we define what is inside/outside of an organisation, we determine when revenue should be recognised etc. In some instances these interpretations will coincide with those of regular people, but at other times they will not. More broadly, these accountants and regulators have been influenced by many things – their personal, cultural and business backgrounds, their corporate and institutional connections, the market economy (the ideology of neoliberalism) and globalisation. The way we “do” accounting in Australia is very much influenced by the IASB, which itself is subject to a number of spatial and temporal influences. I should also point out that the Western (ie. Anglo/American) approach to accounting and financial reporting is different to accounting that has developed in other places – China, Russia and Japan for example, and this is why the concept of one set of accounting standards across the globe is problematic. Hines initially discusses the concept of an organisation – it may be identified by reference to the fence, but not always. What is inside the fence (eg. buildings and land) may be the property of the company, but other things such as the river is not (unless of course the organisation is sold and the value of the river is reflected in an intangible asset). This relates directly to the accounting treatment of internally generated and purchased goodwill. Further, the pollution which is inside the fence never used to be considered part of the organisation because outsiders did not know about it, but now that people do know about pollution, it may be part of the organisation, and Hines suggests that sooner or later it must be accounted for. The costs associated with carbon emissions is a classic example of this. Thirty years ago, the public was not generally aware of this issue. Now, carbon emissions, climate change and global warming are front and centre of the public and political dialogue. Various costing mechanisms have been suggested to value carbon emissions (eg carbon trading schemes, carbon tax). Once these are brought into the company’s accounts the cost of its products increase, which ultimately impacts of “buy decisions of customers” and “investing decisions of investors”. That is, there is an impact on the allocation of scarce resources (ie. the notion of socially constructing). Hines then moves onto the concept of revenue and in particular revenue recognition (realisation) – she highlights the absurdity of some of the rules around recognition. She points out that the accounting concept of revenue does not always match that of “everyday concepts”. This topic is so controversial that it took the IASB around 10 years to develop a standard on revenue recognition. She then introduces the notion of the “full picture” – what is this? It is what we say it is – “We make the picture” (p255). With reference to history, she notes how the full picture will usually change over time. Much power is given to accountants – society believes that we are objective communicators of reality – however, most people do not understand that accounting comprises thousands of judgements about what is (or is not) recorded, how this thing is measured or how it is disclosed. We say that future tax benefits are assets of a company, but what does the general public know about tax effect accounting? We create the concepts of a consolidated entity and consolidated financial statements, but there is no such legal entity as a consolidated group. Consolidated financial statements are fiction of the accounting profession. This is not to say they are not useful – rather that they are something constructed by us. Accounting is socially constructing: Once information is released to the public, it is used by people to “think and act” (p257), or in other words to make decisions. “And by responding to that picture of reality, they make it so: it becomes real in its consequences. And what is more, when people respond

Page 5 of 6

ACCY305 Financial Accounting III Session 1, 2019

Tutorial Solutions Week 2 Professionalism and Ethics of Accountants

to that picture, and the consequences occur, they see it as proof of our having correctly conveyed reality. Clever isn’t it? That is how society works” (p257). Hines makes reference to the impact of accounting on “income distribution and resource allocation”. If we included the cost of some organisational elements (eg. the human cost of operations, pollution) – then this would change the total costs of the organisational goods and services, which would in turn affect resource allocation decisions made by people (whether to buy company products, whether to invest in the company etc). She uses the example of pollution – if the full costs of pollution were included in company costs “it would not help that organisation, would it?” (p255) Further reference to the notion of socially constructing aspect of accounting is in relation to company failures (p256). “Accountants will like to maintain a healthy set of financial statements to get an organisation through difficult times…but if the accounts suggest an organisation is going to fail, so be it” (a self-fulfilling prophecy) (p257-257). PS. Students have also pointed out that “socially constructing” could mean that accounting continues to be actively changing. Good point!

6. Propose how Hines’ (1988) views have a connection with the (un)ethical behaviour of accountants. The power vested in accountants provides ample opportunity for accountants to create the picture of an organisation that they want to create. As mentioned above, if accountants want to present a company as a going concern and viable, they will do just that. If they want to communicate that a company is having financial difficulties, then the disclosure of t...