Aggressive Accounting Can Be Determined By Observing Certain Factors Accounting Essay

Category: Accounting

The risks of continuing to work with the company for the anonymous caller would be being considered as partly responsible for having a hand in the misstatement of the statements in matter. He could put his job and even in his career in jeopardy if he continues to work there as it would only be a matter of time till the cat comes out of the bag. Although there is also a risk of resigning immediately, as the shareholders and external parties could get alarmed by the sudden move and this could impact badly on the image of the company and make external parties doubt if there is something 'fishy' going on the organization. And also the HR Vice President is the CEO's wife, which could turn out badly for the caller if he decides to resign.

The State Board of Accountancy can be of big help in this process as they make it very clear that if misstatement or any other susceptible transactions are observed, it should be reported effectively. 'An auditor must make a concerted, professional effort to determine if there is fraud '. The anonymous caller can file a complaint with the State Board about the organization he is a part of giving them information of the matter and seeking their help and advice. The State Board can be a useful institution for information and for suggestions in matters like these and surely would help the caller get away from his dilemma.

It is believed the caller has very little chance of going wrong if he/she notifies the bank of any wrongdoing since she's not the only one suspecting it ( one accounting personnel having resigned). Also, according to the code of conduct he/she is obligated to be fair and honest in all professional relationships and can disclose information if there is a legal/ professional right to do so. One must keep in mind that she has a strong financial background. Despite all this, I consider notifying the bank at this stage a hasty action since she's been in the company a very short while; I would suggest a candid talk with the CEO and CFO one more time before taking such a huge step because it involved a catastrophic consequence. If still dissatisfied with response or lack of action, she may go ahead and inform the bank. She has already taken a firm action by not signing the bank documents. Meanwhile, she must gather more evidence to substantiate her 'claim' and to avert any poor decisions or costly missteps.

In Case, If he/she does go ahead and notifies the bank then she must immediately notify other stakeholders such as the board of directors and with their input devise a plan to deal with and whether the external auditors should be contacted or not. Another issue is that external auditors utilize and define risk differently, not only that the processes and factors involved in risk assessment also differ. An external audit is concerned only with financial aspects of the entity; normally, compliance and operational issues are not examined.

4)

Considering the current economic conditions, where there are tough competitors all around the world and survival in the market becomes important, organizations carry out material misstatement. In these economic times even small firms that cannot cope up with the rising costs manipulate there financial statements. Aggressive accounting refers to a situation in which organizations makes some changes in the financial statement to display positive results. If an organization is running in a loss, they increase their profit to show that the company is growing so that people can invest or even so that bank could give them further credit. This benefits both the organization and the individual. The top level managers are they key member in such a fraud. They only order there juniors to carry out such misstatements.

For such kind of illegal activities to be carried out in an organization, the top level managers pressurize there accounting managers and junior level people to do as they instruct and if they refuse to do so they threaten them that they will lose their job or be demoted. In other cases the top level managers bribe there accounting staff to manipulate the accounts by giving them extra incentives such as promotions, cash rewards etc. Arguments to resist these pressures include not accepting the bribe to manipulate the financial data also reporting to the external auditors about the misconducts off the organization so that they could that they could take necessary measures.

Aggressive accounting can be determined by observing certain factors. When financial data are being recorded, the accounting staff, the involvement of the top level managers determines how aggressively the management is working. If top level manager are constantly instructing there juniors to enter data in the financial statement that means some kind of misstatements are taking place. Also if the organization revalues there asset at higher percentage and depreciates them by a lower percentage, it would affect the asset column. These activities are not considered illegal by the US GAAP but it's just that it would show a totally different picture of the organization to the stakeholders. Fraudulently reporting of financial statement is not accepted by the framework of US GAAP. It is illegal cause it gives manipulated information about the accounts balances to the investors, customers etc.

5) The incentive for the business was that it was newly set company and it was running at a loss for quite some time. The bank thus stopped reimbursing the companies check and dint give them any further credit. The company needed cash to continue its operation thus they instructed the accounts payable clerk to enter false transaction so that the credit worthiness would increase. The opportunities that the organization has was they had no external auditor to check there accounts. This way the bank would never find out that the accounts are misstated. Another opportunity the organization had was that there top level managers dint have much accounting knowledge, thus there was no proper internal control. The attitude of the managers was very demanding. They would convince their employees that misstating the accounts figures is a common practice and that every other organization does it. The wanted there sales figure to reach their target thus if it dint they would just manually enter some records to meet there targets. Such practices were occurring in this organization.

6)

Revenue must be recognized in accordance with the applicable financial reporting framework in order for an auditor to issue an unmodified opinion. The staff accounting bulletin no.101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statement. The staff believes that revenue generally is realized or realizable and earned when all of the following criteria are met:

Persuasive evidence of an arrangement exists

Delivery has occurred or services have been rendered

The seller's price to the buyer is fixed or determinable

Collectability is reasonably assured

The management hadn't faced any of this criteria mentioned above. Since, none of these criteria were met and no other sales transaction or cash receipts transaction were made. Hence, revenue has not been realized or earned based on the current conditions faced by the company.

7)

The senior executive team had knowingly issued the falsified financial statements by overstating the sales and accounts receivables. The management had knowingly violated the occurrence assertion. This assertion clarifies that all sales transactions and events that have been recorded during the accounting cut off are valid transactions. But in the mentioned case, the management had knowingly submitted financial statements that overstated sales and receivables accounts.

Certain measures would be taken by the external auditor to detect this fraudulent activity. In conducting audit procedures, the auditor examines potent audit evidence. Confirmation is one of the processes that can guide the auditor in detecting such misstatements. The auditor can gain information from a third party regarding the company's internal works and functioning. Inspection of Sales Invoices, customer order and shipping document and examination of application controls will also help validate the occurrence assertion. Proper segregation of duties should be overtaken to stop these types of misstatements.