Accounting in Crisis by dffhrtcv3


									   Accounting in Crisis?

Financial Reporting at a
    Laws of Accounting

   Trial Balances don’t
   Bank reconciliations never do
   Working capital does not
   Return on investments never will
    The “New” Pledge of Allegiance

   One nation, under greed, with stock
    options and tax shelters for all.
Consider Five
    Quotation #1

   Transparent accounting plays an
    important role in maintaining the vibrancy
    of our financial markets.

                               Alan Greenspan
                 Chairman, Board of Governors of
                      The Federal Reserve Board
    Quotation #2

   The single most important innovation
    shaping the (American capital) market
    was the idea of generally accepted
    accounting principles. We need
    something similar internationally.

                            Lawrence H. Summers
             Former Deputy Secretary of the Treasury
              March 9, 1998 Remarks before the IMF
    Quotation #3

   The quality of information we now
    receive from companies in the U.S. is
    about the best we have ever seen and
    exceeds that of almost any other nation.

                             Abby Joseph Cohen
    Chair, Investment Policy Committee Goldman,
                                     Sachs & Co.
    Quotation #4

   We are in a situation now in our society
    where the temptations to provide “bad”
    financial reporting are probably greater
    than they used to be. The need to get
    the stock price up, or to keep it up, is
                         Floyd Norris, Reporter
              2001 Annual Report of the Financial
                         Accounting Foundation
    Quotation #5

   While the U.S. accounting is generally
    recognized as the best in the world, the
    Enron collapse that unfolded in 2001 has
    reminded us all that there is still room for

               Manuel H. Johnson, FAF Chairman
                               2001 Annual Report
            of the Financial Accounting Foundation
What is the “purpose”
of Accounting?
    Objective #1

   Financial reporting should provide
    information that is useful to present and
    potential investors and creditors and
    other users in making rational
    investment, credit, and similar decisions.
    Objective 1 continued

   The information should be
    comprehensible to those who have a
    reasonable understanding of business
    and economic activities and are willing to
    study the information with reasonable
    Objective #2

   Financial reporting should provide
    information to help present and potential
    investors and creditors and other users
    in assessing the amounts, timing, and
    uncertainty of prospective cash flows.
    Objective #3

   Financial reporting should provide
    information about the economic
    resources of an enterprise, the claims to
    those resources (obligations of the
    enterprise to transfer resources to other
    entities and owners’ equity), and
    Objective #3 continued

   The effects of transactions, events, and
    circumstances that change its resources
    and claims to those resources.
                       First-Order Feedback System
Boundary                                                  Environment

           Inputs               Process                     Outputs

                                 Feedback Loop

                    Control                      Sensor
    General Purpose Financial
   GPFS means that Information is . . .
       Not exactly what the investors need,
       Not exactly what the creditors need,
       Not exactly what the managers need,
       Not exactly what the regulators need,
       Not exactly what the tax man needs.
       It’s not exactly what anybody needs
       IT’S A COMPROMISE!!!
     New Math for a New
Allan Webber
Issue 31, p. 214 January/February 2000
    New Math for a New Economy

   Accounting is all about accuracy.
   Accounting is all about hard numbers.
   Accounting is all about accountability.
   Accounting is a time-honored tool for
    making hard decisions about dollars and
    cents, about profits and losses.
    New Math for a New Economy

   Accounting is the land of bean counters,
    of number crunchers – men and women
    with green eyeshades and calculators.
   Accounting says Baruch Lev, Professor
    of Accounting and Business at New York
    University’s Stern School of Business is
    increasingly irrelevant.
    New Math for a New Economy

   The problem, says Lev, is that the
    systems of accounting and financial
    reporting that are being used today date
    back more than 500 years.
   These systems are not only part of the
    old economy, they’re part of the old, old
    New Math for a New Economy

   “If you cannot be a good accountant,”
    Pacioli wrote, “you will grope your way
    forward like a blind man and may meet
    great losses.”
    The Evolution of the
    Knowledge Professional

Robert K. Elliott and
Peter D. Jacobson
Accounting Horizons, March 2002
   Wealth creation depends on knowledge
    work as never before, a change full of
    implications for those who provide
    information services.
   We argue that a new economic model
    has created a need for a new type of
    information professional.
    Four Economic Paradigms

   Hunting and Gathering
   Agriculture
   Industry
   The Information Economy

   Is it possible that the role of the new
    information professional will never be
    fully defined? Since technology is now
    advancing at such a rapid rate, could the
    role of the new information technology
    professional be a moving target?

   Is it possible for a profession to
    consciously “reinvent” itself?
   Is the accounting profession attempting
    to “reinvent” itself, or what?

   The author argues that the accounting
    profession should take the initiative to
    expand its role in the information
    economy and serve as the foundation of
    the new information professional. Are
    there other professional disciplines that
    might serve as well or better as a
    foundation for the new information
    Financial Reporting at a
Michael H. Sutton
Accounting Horizons
December 2002
    Challenging Questions
   Can we believe in and rely on the
    independent audit?
   Can we believe that our accounting and
    disclosure standards provide the
    transparency that is essential to
    investors and the public?
    Challenging Questions
   Can we rely on self-regulatory systems
    to ensure audit quality and to root out
    and discipline substandard
   No one wants Congressional Required
    Accounting Principles (CRAP makes a
    pretty lousy acronym!)
    Challenging Questions
   Can we rely on corporate governance
    processes – oversight by boards of
    directors and audit committees – to ride
    herd on management and to see to it
    that auditors do their job?
Some Recommended
    Regulatory Processes
   Timely and thorough investigations of
    circumstances that may involve
    fraudulent financial reporting.
   Objective and fair assessments of the
    role and performance of auditors.
   Timely and meaningful discipline of
    auditors and firms that violate acceptable
    norms of conduct.
    Regulatory Processes
   Regular oversight and periodic
    examinations of the policies and
    performance of independent auditors.
   Timely and responsive changes in
    professional standards and guidance
    when a need for improvements is
So . . . What is “wrong”
with Accounting?
    Fundamental Problems

   “Transaction” oriented
   Narrow focus on financial data
   Reporting is periodic and not real-time
   Limited accessibility of information
   Too high a level of aggregation
    Fundamental Problems

   Limited flexibility which prevents
    answering queries that cross functional
THE Fundamental
Accounting Problem?
    THE Fundamental Problem

   We are using a 500-year-old system to
    make decisions in a complex business
    environment in which the essential
    assets that create value have
    fundamentally changed.

                 Baruch Lev Professor of Accounting
                      NYU Stern School of Business
                       New Math for a New Economy
  Shifts in Assets . . .



    Industrial                  Information
       era                          era

                                           Robert K. Elliott
                              Accounting in the 21st Century
    Intangible Assets

   Assets associated with product
    innovation (R&D)
   Assets associated with a company’s
   Structural assets – better, smarter,
    different ways of doing business.
   Monopolies (barriers to entry).
                                               Baruch Lev
                               New Math for a New Economy
    Intangible Assets

   Expensive to acquire and to develop.
   Extremely difficult to manage
   Property rights are fuzzy

                                                Baruch Lev
                                New Math for a New Economy
    Matching Principle Violation?

   Accounting is based on the matching
   Good matching = good income number.
   Knowledge assets = mismatch.
    What does all of this
    have to do with AIS?
Subtitle: Are you trying to impress
me? Or, are you trying to scare
    Accounting in 2015

Michael Alles, Alexander Kogan
and Miklos A. Vassarhelyi
The CPA Journal, November 2000
    Relevance of Accounting
   Central to the future of accounting is the
    continuing relevance of accounting
    measurement for corporate management
    and firm valuation.
    Relevance of Accounting
   The balance sheet and income
    statement are ceasing to function as
    relevant measures of a business as
    underlying processes undergo profound
    change . . .
    Profound Changes . . .
   Many companies only own research and
    development (R&D) and outsource
    distribution and manufacturing.
   Physical possession of inventory
    becomes meaningless where supply
    chain management is key.
    Profound Changes . . .
   Businesses have adopted unorthodox
    ownership structures emphasizing
    alliance, tracking stocks, profit sharing
    agreements, and opportunistic joint
    Profound Changes . . .
   Intellectual property is a primary source
    of a firm’s market valuation, but
    traditional assessment methods
    understate its value.
    New Technologies
   Information capture technology
   Access and monitoring technology
   Storage
   Telecommunications and inter-
   Pervasive computing
    New Technologies
   XML standards
   Automatic workpapers
   System monitoring architecture
   Automatic inventory tracking
    The Sarbanes-Oxley
    Act of 2002
Public Companies Accounting
Reform and Investor Protection Act
of 2002
    Sarbanes-Oxley Act of 2002

   Directly impact these groups:
       CPAs and CPA firms auditing public
       Publicly traded companies, their employees,
        officers, and owners. (Includes CPAs
        employed by publicly traded companies as
        CFOs or in their finance department)
    Sarbanes-Oxley Act of 2002

   Directly impact these groups:
       Attorneys who work for or have as clients
        publicly traded companies; and
       Brokers, dealers, investment bankers and
        financial analysts who work for these
   Establishes a new Public Company
    Accounting Oversight Board (PCAOB).
   Board composition
       Two must be or must have been CPAs
       Three must not be and cannot have been
   Board composition – continued
       Chair may be CPA, but must not have
        practiced accounting during the five years
        preceding appointment.
       Appointed by the SEC.
       Subject to SEC oversight
    PCAOB - Funding
   The Board will be funded by public
    companies through mandatory fees.
   Accounting firms that audit public
    companies must register with the Board
    and pay registration and annual fees.
    PCAOB – Standard Setting

   The Board will issue standards or adopt
    standards set by other groups or
    organizations, for audit firm quality
    controls for the audits of public
    PCAOB – Standard Setting

   These standards include: auditing and
    related attestation, quality control, ethics,
    independence and “other standards
    necessary to protect the public interest.”
   The Board has the authority to set and
    enforce audit and quality control
    standards for public company audits.
    PCAOB – Other Powers
   Investigative and Disciplinary authority
   International authority
    The Sarbanes-Oxley
    Act of 2002
New Roles for Audit Committees
and Auditors
    Audit Committees & Auditors

   Auditors report to audit committee
   Audit committees must approve all
   Auditor must report new information to
    audit committee
   Offering specified non-audit services
    Audit Committees & Auditors

   Audit partner rotation
   Employment implications.
    The Sarbanes-Oxley
    Act of 2002
Criminal penalties and protection
for whistleblowers.
    Criminal penalties
   Failure to maintain workpapers
   Document destruction
   Securities fraud
   Fraud discovery
   Protection for whistleblowers

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