Accounting

Accounting

Question One

The Sarbanes-Oxley Act was specifically enacted to deal with the rampant financial fraud that plagued the corporate sector. One of the provisions that made a significant impact is on section 206 regarding the apparent conflict of interests evident during company auditing. In order to combat this vice, the act stipulates that the chief executive officer, controller, CFO, Chief Accounting Officer and other persons serving at executive capacities should not have served at the selected the auditing firm during the preceding fiscal year of the audit. This provision is very effective since such people present possibilities of colluding with the audit firms and thereby presenting falsified information. Another significant provision is the one that renders chief executive and chief financial officers criminally liable to any false information contained in the financial statements of the company (Albrecht, 2012).

One provision that could have been included in the Act to strengthen the Responsible Stewardship and Integrity of the accounting profession is one that would also require executive officers to declare their wealth before serving in any executive capacity. This could help in tracking anomalous financial changes and consequently aid recovery processes. The act also has various provisions that are deemed unnecessary. Most of the provision regarding the new listing standards and regulations of corporate governance are redundant in nature because these are already taken care of by the Securities and Exchange Commission (SEC). This commission is already fully mandated with approving and enforcing accounting standards (Garrison, et al, 2010).

Question Two

One recent scandal is the Diamond Foods accounting scandal. An audit into the company’s business practices revealed a couple of warning signs such as the extraordinary timing of payment made to material suppliers, an unusual leap of the company’s profit margins and volatile inventories and cash lows. The first measure undertaken after the detection of the fraudulent practice was the immediate suspension of the company’ chief executive officer and the chief financial officer (Zack, 2009). Consequently, the company faced civil enforcement action by the SEC for its failure to keep accurate financial books and accounts and the failure to set up adequate internal controls for detecting the payments. Timely detection of this practice could have been made possible by checking the balance sheet, accruals and M score. Careful and timely analysis of these would clearly highlight warning signals of an impending accounting fraud. It is hard to prevent such an act from happening although the effective implementation of section 302 of the Sarbanes-Oxley Act whereby the company executives would have first issued a certification of the financial reporting that states that the records are accurate (Jones, 2011).

Question Three

The Historical Cost Concept in valuing the cost of Long-Term Assets is based on the perception that accounting is based on past events. With this regard, accounting transactions are therefore supposed to be recorded at their historical costs. This concepts is adopted my many institutions including the USGAAP as opposed o the IFRS. However, the two concepts are similar in that both require costs to be included in the cost of the asset the apparent future economic benefits can be estimated relatively accurately (Godfrey, 2010). The two also require the cost of dismantling and asset and the restoration to its site are included in the cost of the asset. The underlying difference is that under the Historical Cost Concept, revaluation is not permitted whereas the IFRS system all allows for the revaluation of any class of assets on the basis the revaluation is fair value and done on a regular basis (Weygandt, et al 2010).

Question Four

The issuance of bonds is beneficial in that is does not affect shareholder control. This is because bondholders lack the voting rights and thus the existent shareholders retain the control of the company. The underlying disadvantage to this is that the interest is paid periodically and the principal is repaid on maturity of the bond. Financing through a bank loan is advantageous in that is very fast for a qualified borrower (Weygandt, et al 2010). The underlying disadvantage is that it often leads to decreased cash flow and there are times when payments can overtake income. Equity financing on the other hand is advantageous in that they lack costs of servicing such as the case of bank loans or debt finance. However, they have limitations in that it involves some loss of power from the management in terms of making management decisions (Nikolai, et al 2010).

 

References

Albrecht, W. S. (2012). Fraud examination. Mason, OH: South Western, Cengage Learning.

Godfrey, J. M. (2010). Accounting theory. Milton, Qld: John Wiley.

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2010). Managerial accounting. Boston: McGraw-Hill/Irwin.

Jones, M. (2011). Creative accounting, fraud and international accounting scandals. Chichester, West Sussex, England: John Wiley & Sons.

Nikolai, L. A., Bazley, J. D., & Jones, J. P. (2010). Intermediate accounting. Australia: South-Western/Cengage Learning.

Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2010). Financial accounting. Hoboken, NJ: Wiley.

Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2010). Managerial accounting: Tools for business decision-making. Hoboken, NJ: Wiley.

Zack, G. M. (2009). Fair value accounting fraud: New global risks and detection techniques. Hoboken, N.J: John Wiley & Sons.

 

 

 

 

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