Accounting Standards Serve As Tools For Eliminating Subjectivity In Accounting Accounting Essay

Category: Accounting

Accounting has been defined in various ways. One of the significant one being is "the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof." Financial Statements and position contains accounting concepts which requires detail explanation. Here lies the importance of Accounting Standards. Accounting Standards is the written statements issued by institutions of the accounting profession or institutions in which it has sufficient involvement and established expressly for this purpose. For example, in India, Institute of Chartered Accountants of India (ICAI) harmonizes the diverse accounting policies and practices for Indian corporates to follow.

Every business entity prepares its financial statements to show its performance in monetary terms as either profits or losses. It is used by many stakeholders then. There are various methods available to an entity for recording such business transactions while preparing these statements. There is absence of uniformity because of such transactions in the statement and it becomes complex and subjective (Sanjay J Bhayani). The accounting standards are then used for harmonizing this accounting practices and differences. Compliance with accounting standards by enterprises is specified in the laws of the country. The various regulatory bodies in the country look after the administration of the accounting standards. The regulator calls for implementation of accounting standards by enterprises as per requirements in relevant sections.

In the professional environment, accounting has no relevance without the standards. It can be termed as a legal discipline because of its importance (Shri A.K. Chowdhury). The preparation and presentation of financial statements based on accounting standards is a useful way of bringing together different accounting practices. Accounting standards states how certain categories of events and transactions have to be recorded in the accounting books. These, in turn, serve the purpose of uniformity in the outputs of financial results and efforts, and enable a fair presentation of the financial picture. For an interested investor or a trade partner, it ensures a reasonable accuracy of the data presented. For peers, it enables a reliable comparison. For the supervisor, it provides a set of authentic data. Countries all over the world , therefore, have evolved national accounting standards.

Case Examples of Accounting Scams due to lack of proper Accounting Standards

In all cases, it is commonly seen that the top management has been key to fudge the accounts, price manipulation and cheat the investors.

Bank of Credit and Commerce International (Pakistan based bank)

It was founded by Agha Hasan Abedi with more than 400 branches spread in 78 countries, and over $20 billion in assets. At that point this company was one of the world's biggest private banks in terms of assets then. In 1991, an accounting scam of over $20 billion was discovered. Several charges of money laundering, bribery, tax evasion, accounting scandal was found. Accounting Standards was not much developed in the country and accounts were used to manipulate the books.

WorldCom

It was one of the world's largest telecommunications companies with approximately about 20 million customers and 80,000 employees. It was found to manipulate financial records during the 1990s. The company which was charged with fraud by the US SEC in 2002 was found to be guilty of $3.85 billion accounting scandal.

Xerox

Xerox was found to be guilty of accounting manipulation to the extent of $3 billion in 2002. At that time, the SEC found that Xerox’s creative accounting practices accelerated the company's recognition of equipment revenue by $3 billion, and increased its pre-tax earnings by close to $1.6 billion. According to the auditors KPMG, there was no manipulation and they insisted it was in accordance with the accounting accepted principles.

Enron

It was a breakthrough case in the history of accounting. It raised several questions about the accounting practices of many corporations throughout the United States. It misappropriated profits, and hid debts to offer a very good picture of the accounts of the company. Its assets and profits were inflated, and even wholly fraudulent and non-existent. It led to closing of one of the biggest accounting firms, Arther Andersen

Indian Context

Company Involved: CRB Capital Markets Limited (1996)

Amount Involved: Rs 1200 crore

Chain Roop Bhansali, the then Chairman of Capital Markets limited was blamed of draining off Rs 12 billion in the well known CRB’96 scam. CRB Cap markets was accused of using its SBI accounts to channel bank funds, claiming it was just claiming interest warrants and refund warrants. The UTI and the Gujarat government also incurred huge losses.

Company Involved : DSQ Software

Amount Involved: Rs.595 crore

Dinesh Dalmia, promoter, DSQ Software was accused of falsifying acquisitions and making biased allotments. This resulted in arrest of Dalmia in 2006 followed by imprisonment.

Company Involved : Satyam Computer Services

Amount involved: More than Rs 9000 crs

The founder and CEO of Satyam Computers, B. Ramalinga Raju which was the fourth-largest IT services firm in India, declared on 7th January that his company had been misrepresenting its accounts for more than five years, overstating revenues and showing dubious profits by close to $1.1 billion (R. Narayanaswam). Raju was forced to admit to his fraud following a failed attempt to have Satyam invest $1.65 billion in Maytas Properties and Maytas Infrastructure- firms promoted by Raju family. Raju admitted that Satyam's balance sheet included Rs. 7,135 crore) as cash and bank balances which did not actually exist and accrued interest. The 2008 second quarter revenues was also fudged by Rs. 588 crore to Rs. 2,800 crore.

Need of the Sound Accounting Standards

In the globalized world the accounting standards has been changed from time to time and has come a long journey (Dr. K. Raji Reddy). They should satisfy the criteria of relevance, objectivity and feasibility.

They have provided valuable insight in the field of accounting and have brought about qualitative improvement in financial reporting.

They have been successful in bringing uniformity in accounting practices.

Without accounting standards, accounting information becomes incomparable, inconsistent and unreliable.

the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and how the entity manages those risks

Conclusion

The above information reveals that the published financial statements is of outmost importance to shareholders, creditors and external parties. Hence it is the responsibility of the accounting profession to ensure that the required information is properly presented. If the accountants present the financial information in their own way, the information may not be valid and hence may not serve the purpose. There is, therefore, the urgent need that certain standard should be followed for drawing up the financial statements so as to avoid uncertainty and ambiguity.

Accounting has become more and more complex in all sectors of the present global economy with the development of the technological changes. Every person, economic sector and international environments call for simplified procedures of the accounting system. The sound health of any corporate enterprise can be judged as well as assessed according to its financial position at any time of the year. Information that is conveyed through the various published accounts at the end of each accounting period has been accepted to be a more effective mode of providing information for improvement and progress of the accounting standard.