The Role of Ethics and Governance in Financial Accounting

In the business organizations, Accounting is considered as an important aspect. Accounting refers to the processes to measure, process and communication of financial information of the companies. In other words, accounting helps the business organizations in correctly keeping all of their financial accounts (Johnson and Noguera, 2012). In the process of accounting, certain factors are required to be taken into consideration for the smooth running of accounting works. The first two factors are Ethics and Governance. It is the responsibility of the accounts of the companies to act in an ethical way; it implies that there needs to be honesty and integrity in the works of the accountants. In addition, it is the duty of the accountants to report about the accounting standards and principles used for the development and presentation of financial statements. At the same time, they are also required to report any kind of change in accounting principles for the financial statements (Loeb, 2015). Thus, the main aim of this report is to analyze and evaluate various aspects of financial accounting for Sunshine Ltd. As per the provided information, it can be observed that some accounting issues are going on in the organizations and this report sheds light on those issues by analyzing and evaluating them.

The above discussion shows that Ethics and Governance are two major elements of accounting in the companies. In the smooth running of the accounting works, ethics and governance play an integral part. In the presence of accounting ethics, the accountants are able to implement trust in the whole accounting process. At the same time, the presence of ethics ensures that there is transparency in the development and presentation of the financial statements of the companies and transparency leads to the development of trust among the shareholders and investors. At the same time, accounting ethics helps to maintain confidentiality of the financial matters of the organizations (Thomas, 2012). In the presence of ethics, organizational accountants will not disclose the confidential financial information to the outsiders. Moreover, the establishment of ethical business environment helps to foster collaboration among the employees of the organization. Apart from these, accounting ethics helps the accountants to consider all the necessary aspects at the time of the development and presentation of financial statements. Like ethics, another important aspect in accounting is the presence of Governance. The presence of governance in accounting ensures that the accounting planning process is done in the most appropriate manner. In the presence of effective governance policies, business organizations become able to disclose their financial information for the shareholders and investors. It needs to be mentioned that every financial decisions of the companies largely depend on the availability of financial data and information. In the presence of effective accounting governance, business organizations can get necessary financial data and information for making effective business decisions (Bonaci et al. 2013). 

Violation of Accounting Ethics in Sunshine Ltd

From the provided information of Sunshine Ltd, it can be observed that the general manager of Sunshine Ltd, Kam Sunshine, has asked Maria Mars to reduce the amount of profit in next two years so that they can be transferred to 2018 and 2019 to cover the losses. For this reason, Maria Mars, the accountants of the company, has changed the method of depreciation by not disclosing it in the notes of the financial statements. From the whole process, it can be observed that there is a violation of accounting ethics. In all these processes, three principles of accounting ethics and governance have been violated; they are Integrity, Objectivity and Professional Behavior. According to the principle of honesty, the accountants of the companies are required to be straightforward and honest while doing the professional works. Maria Mars’s acceptance of the order to transfer the profit in an unethical manner shows that she has not maintained the integrality of accounting professions due to the fear of losing the contract (Carey, Monroe and Shailer, 2014). After that, according to the principle of objectivity, the accountants of the companies will not compromise their true professional judgment under any kind of influence or bias. From the provided information of Sunshine Ltd, it can be observed that Maria Mars changed the method of depreciation by coming under the influence of the general managers. Due to this, she has not expressed her true professional judgment. Thus, for this action, she has violated the objectivity principle of accounting (Han Fan, Woodbine and Cheng, 2013). From the above two actions, it can be seen that Maria Mars has failed to act professionally. She has violated the principle of professional behavior by not disclosing the change in depreciation method in the notes of financial statements. Hence, from the above discussion, it can be observed that Maria Mars has violated the major ethical principles of accounting.

Depreciation refers to the process to allocate the cost of intangible assets over their useful lives. Business organizations use to depreciate their tangible assets for both tax and other accounting purposes. It is the responsibility of the accountants of the companies to manage various aspects of depreciation. At the time of the management of various aspects of depreciation, the accountants are required to comply with certain principles and standards. From the provided information of Sunshine Ltd, it can be seen that Maria Mars has not mentioned the change in the method of depreciation in the notes of financial statements. This is an inappropriate method as it is necessary for the accountant to mention any kind of change in accounting policies in the notes of financial statements (Warren and Jones, 2018). For this reason, accountants have certain responsibilities in case of the change in depreciation as they have to follow certain steps in recording the changing method of depreciation. These processes are discussed below: 

Steps to be Followed in the Change of Depreciation Methods

Change in Methods: It is the decision of the companies that whether there will be a change in depreciation or not. However, in order to change the method of depreciation, there must be valid reason for the companies as the companies must be beneficial from the change in the method of depreciation. In this aspect, it needs to be mentioned that change in the method of depreciation leads to the change in the accounting principles of the companies. The change in the method of depreciation affects the carrying value of the assets as it changes the amount of accounting estimates. There are many instances where companies have changed the method of depreciation for some unethical reasons. In that case, the change in the method of depreciation will not be appropriate for the companies (Warren and Jones, 2018).

To Report the Change: The accountants are required to follow certain steps while changing the method of depreciation. First, it is the responsibility of the accountants to file the application for the change in the method of depreciation. It is required for the accountants to apply the new depreciation method before permanently switching it. The adoption of the new method needs to be done in the current year and it needs to be carried forward throughout the remaining life of the assets. This aspect saves the effort to restate the balance sheet of previous year and income statement for reelecting the change (Edmonds et al. 2013).    

Considerations: According to the accounting standards, accountants are not required to make retroactive revisions due to the change in depreciation method. The simple adoption of new depreciation method is enough to carry out the carrying value of the assets. The change in depreciation method changes both time and effort of the companies. Most importantly, companies are required to mention the change in depreciation method in the notes of financial statements so that the shareholders and investors can know the change. Hence, it is required for Maria Mars to follow the above-discussed steps in order to report the change in depreciation method (Edmonds et al. 2013).                

Stakeholders are considered as the important parts of any business. Stakeholders refer to a person, group or organizations having interest in the business of any organization. Thus, the organization’s actions, policies and objectives can affect the stakeholders. The examples of stakeholders are employees, directors, creditors, shareholders, investors and others. No stakeholders have equal value. The employees of the companies are entitled to have fair trade while the employees are not entitled to same consideration. It is the responsibility of the companies to take care about their stakeholders by adopting correct accounting policies and by disclosing all the necessary information about accounting procedures in the financial statements. In case of Sunshine Ltd, stakeholders play an important part. The general manager, Kam Sunshine, wants to reduce the amount of profit in the current year so that they can be transferred to 2018 and 2019 in order to make their shareholders happy. However, this particular aspect can create negative impact on the shareholders, as Maria Mars did not disclose the information regarding the change in the method of depreciation in the notes of financial statements. It implies that the accountants are required to disclose all the necessary information about change in accounting policy for the stakeholders (Fassin, 2012).         

AASB116 is considered as an important regulation for the valuation and disclosure of various aspects related to property, plant and machinery. AASB116 provides all the means for the revaluation of property, plant and machinery in elation with the sale of assets. AASB116 includes the major factors required to be disclosed by the companies related to property, plant and machinery. First, companies are required to disclose information about the measurement base used for the determination of gross carrying amount. At the same time, companies are required to disclose the depreciation used by them. In case of fixed assets, AASB116 demands the accounts to disclose the useful lives of the assets and the rate of deprecation (Laing and Perrin, 2014). As per the regulation of AASB116, the gross carrying value along with the accumulated depreciation at the beginning and end of the year needs to be disclosed. According to AASB116, there are some major components of reconciliation of carrying amount at the end and beginning of the year. They are assets classified for sales; purchase of any additional assets; acquisition of any assets with the help of business combination; increase or decrease in assets due to the process of revaluation; the recognized impairment loss or profit as per AASB136; amount of depreciation; difference in values raised from translation of financial statements and other changes. According to AASB116, financial statements need to disclose some other items. They are the amount and existence of restrictions on property, plant and machinery; the recognized amount of expenditure in the items of property, plant and machinery; the amount of contractual commitments related to property, plant and machinery and others. Thus, it can be seen that the implementation of AASB116 makes the companies able to disclose all the necessary aspects of property, plant and machinery for the shareholders and investors of the companies (Hu, 2012).        

Conclusion

From the above discussion, it can be seen that ethics and governance are two major aspects for the accounting of the companies. In the presence of ethics, it is possible to bring transparency in the whole accounting process along with trust among the employees. In addition, confidentiality of financial information can also be maintained. The above discussion also shows that the act of Maria Mars has violated three major ethical principles of accounting; they are Integrity, Objectivity and Professional Behavior. In addition, it can also been seen that accountants have certain responsibilities in recording the change in depreciation method as they have to first apply for the change in depreciation method and they are also required to report the change in financial statements. As per the above discussion, different types of stakeholders can be seen in the companies; they are employees, directors, customers, shareholders, inventors and others and different activities of the companies affect these shareholders. It can also be seen that AASB116 is an important regulation for the companies as it helps in the disclosure of various aspects related to property, plant and machinery. 

References

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Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.