The Bre X Scandal Accounting Essay

A short introduction to what happened. Explain the fraud.
Fraud is defined as intentionally deceiving or causing damage to another individual or individuals in order to acquire personal gain. It is a misrepresentation of specific facts by a person aware of the falseness in order to persuade others, so the individual is able to achieve that personal gain.
The Bre-X scandal is a perfect representation of fraud. It began in 1990 when a Canadian based company from Calgary, Alberta declared that they had made a discovery of a “world-class gold deposit” in Busang, Indonesia. The gold reserves kept on increasing until reportedly 200 million ounces of gold had been found. Along with this amazing discovery of gold, the share prices for the company increased drastically, leading to their listing on the Toronto Stock Exchange. With the success Bre-X had achieved, other powerful mining companies were interested in purchasing and buying them out. At this point, the insiders from Bre-X were multimillionaires.

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When an investigation began in 1997, people soon discovered that there was actually hardly any gold in Busang. It was discovered that alluvial gold dust had been purchased from local Indonesian placer miners to “salt” the rock cores. It was reported that in 1996, the salting had increased to the point where the metallurgists of Bre-X hired laborers involved in a construction project to assist with the mixing. It was a complete scam, and there was no recoverable gold. With this horrendous discovery, the share prices plummeted, resulting in a drop of $6 billion in market value. The individuals who were owners of these shares suffered gigantic and significant losses.
Introduce the company involved, what industry, financial health (before the fraud) and history.
Bre-X was founded and created in 1988 by David Walsh. The initial objective of the company was to search for diamonds located in the North West Territories of Canada. The company was not able to achieve success in finding any significant deposits of diamonds in the Northwest Territories. During this time, Bre-X Minerals Ltd’s stock listing was on the Alberta Stock Exchange, obtaining an average price of 27 cents between 1989 and 1992.
David Walsh filed for personal bankruptcy in 1993 due to the accumulation of $60 000 in credit card bills. Financially, Walsh and his company were not finding much success, so he decided to sell part of his ownership in Bre-X for $10 000. Walsh realized that his company was not achieving much success and that he had to find different opportunities. He decided to go to Indonesia to look for opportunities with his friend, a geologist named John Felderhof. Felderhof, along with another geologist, believed there was a special opportunity in one of the sites in Indonesia. This site was 57, 571 hectares in Samarinda, East Kalimantan, Indonesia. It was also known as Busang. After being convinced by Felderhof, Walsh decided to take the risk. Bre-X purchased the site for $80, 100.
Bre-X was not financially sound, and received three different private placements. The first placement was initiated with Ondaatje McCutcheon, Ltd for $4.5 million in March 1994. More capital was needed for further drilling to continue, so that the exploration was funded. The second private placement, initiated in May 1995, was with Nesbit Burns, Scotia McLeod, and McLean McCarthy Ltd for $7.5 million in common shares. This was used towards working capital and to proceed with and fund exploration. The third private placement was by Nesbit, Scotia McLeod, Levesque Beaubien Geoffrion, and First Marathon Securities for $30 million in February 1996. Bre-X used these private placements to cover the expenses of their drilling and exploration for gold.
State the “players” or key personnel involved in the fraud.
Most Bre-X employees were involved with this gold mining fraud, but there are three main individuals who orchestrated it. David Walsh, John Felderhof and Michael de Guzman were the key personnel involved in the fraud.
David Walsh was known as the founder of the company and the CEO. While he did not ever admit of any wrongdoing, it is clear that he was very involved. When Freeport analyzed the gold, they realized that the gold was alluvial, meaning it had originated from rivers, and was not gold that originates from volcanic deposits. The tests taken by Freeport were not matching the results reported by Bre-X. At this point, Walsh was threatening legal action upon false allegations because he knew that the results from his company were accurate. A couple of days, Bre-X admitted that some of the results were in fact overstated due to invalid samples. David Walsh was clearly aware of the entire scandal, which helped him earn millions, but constantly denied any reports of fraud.
The other two major players involved in the fraud were the two geologists who established Busang as the mining site, John Felderhof and Michael de Guzman. They were both confident with the existent of gold in this area, but eventually realized that they were mistaken. The reason of the salting is thought to be due to the faith of these two geologists in the gold that they thought was located at Busang. Salting the rock cores was a method of ensuring enough capital to fund the exploration for it. Eventually, Bre-X shareholders’ expectains grew, but there was no actual gold being found. Instead, the salting operation continued leading to the biggest mining fraud in history. Felderhof and de Guzman did not want to accept that they were wrong, so they used this method to cover it up until gold was finally discovered.
What happened to the “players”? Jail time, fines, etc.
The Bre-X fraud led to billions of dollars being lost, but there weren’t any consequences for the people involved. The three men that schemed and generated this entire scandal were never met with any type of consequences laid upon them legally. Whether it was lack of evidence or the Canadian court system, but it seemed as if everyone involved got off very easily.
David Walsh made earnings of $35 million by selling shares in Bre-X. Going from filing for bankruptcy to making $35 million is a large difference, especially knowing this success was obtained through a fraud. Walsh would not be charged legally, meaning he had become a multimillionaire through this scandal. After the collapse of Bre-X, Walsh moved to the Bahamas with his earnings. Shortly after, David Walsh would die due to brain aneurysm at the age of 52.
John Feldorhof, the chief geologist of Bre-X, made $84 million by selling his Bre-X shares. He would eventually move to the Cayman Islands, and still resides there. Out of all the people involved in the fraud, he was the only one who was tried in Canada. Felderhof was being tried on the charges of insider trading and misleading investors. Many argued that he should have been charged with fraud and not these less disciplinary charges. Either way, in July 2007, the judge reached a not guilty verdict on this case. John Felderhof was found not guilty.
Michael de Guzman is the most interesting case out of these three men. He was not able to gain as much as his partners through this mining fraud. Freeport had demanded to know about the differing results they had received from their examination of the gold, so de Guzman was sent to deal with the Freeport representatives. He jumped out of the helicopter that was taking him to Indonesia. He would fall 240 meters to his death. It was claimed that it was a large part due to his fight with Hepatitis B. It was just a couple of days before the fraud was uncovered to the public, leaving many people to suspect that he couldn’t take the pressure and eventual allegations.
State details of the actual fraud – type of fraud, $$ involved
The Bre-X scandal is the perfect example of a true fraud that results from dishonest and deceitful business ethics, morals, and principals. The Bre-X scandal is considered to be the biggest mining and gold scandal of all time, and one of the biggest stock scandals in Canadian history. The Bre-X scandal significantly damaged the Canadian Financial Markets and caused substantial reductions in consumer buying and trading confidence, which caused a considerable amount of damage to the Canadian economy. Subsequent to the collapse of Bre-X in 1997, its stocks and shares became worthless and left investors with significant losses.
The Bre-X scandal began in March 1993, subsequent to the company purchasing a large mining site in Busang, Indonesia (on Borneo). Subsequent to Bre-X purchasing the mining site in Busang, it boasted that it was sitting on the largest known gold deposit in the world. In October 1995, Bre-X announced that it had discovered significant amounts of gold on its mining site in Indonesia. Subsequent to this, the company had been followed and recommended by some of the best known gold analysts in both Canada and the United States. Consequently, there was a lot of optimism and sanguinity in the stock market, as investors and brokers wanted to invest into Bre-X in hopes that they will became instantly rich overnight. This led to Bre-X being added to the Toronto Stock Exchange’s TSE 300 index and traded on NASDAQ.
At its climax and peak, the market capitalization of Bre-X reached over 6 million Canadian dollars. This extremely high market capitalization is quite suspicious and apprehensive as Bre-X was a penny stock four years earlier and only had a peak market capitalization measured in the thousands. Bre-X’s massive growth and market capitalization expansion was all based on fraudulent claims and no real hard evidence and proof; the hype of the Bre-X stock from financial analysts coupled with the boastful comments made by Bre-X led to the skyrocketing and soaring prices and values of its stock, which, in turn, led to the increase in Bre-X’s market capitalization.
The Bre-X fraud began to quickly unravel on March 26, 1997 when the American firm Freeport-McMoRan, a forthcoming partner in excavating the Busang gold site, publicly announced that it conducted due-diligence core samples and found insignificant amounts of gold in the excavated samples. This public announcement caused the rapid selling of Bre-X stocks which, in turn, caused the postponing of a mining deal between Bre-X and Suharto. Bre-X blatantly denied the accusations by Freeport-McMoRan and demanded more reviews of the gold quantity at the site by other gold analyst companies. This led to a third-party independent company, Strathcona Minerals, being brought in to check the gold samples at Busang. When the report with the results from the Strathcona Mineral analysis was published on May 4, the Busang ore samples had been salted with gold dust. It was discovered that alluvial gold dust had been purchased from local Indonesian placer miners to “salt” the rock cores. It was reported that in 1996, the salting had increased to the point where the metallurgists of Bre-X hired laborers involved in a construction project to assist with the mixing. It was a complete scam, and there was no recoverable gold in the Busang mining site.
Subsequent to discovery of the gold scandal at Busang being revealed, Bre-X stocks plummeted in value and trading of the stock ceased and the stock was removed from the TSX and NASDAQ. Consequently, mutual funds, pension plans, and private investors all over North American took substantially heavy losses subsequent to the stock plummeting. Numerous class-action lawsuits were filed in Canada and the United States; some of these lawsuits were targeted towards Canadian and American investment firms because they had recommended the stock for so long.
State what GAAP principles were violated during the fraud and tell how the GAAPS were violated
The GAAP’s that were violated and contravened during the Bre-X scandal were: The Principle of Conservatism, The Objectivity Principle, and the Cost Principle. These GAAPs were all violated due to the fact that the accountants of Bre-X were refusing to undertake proper business ethics in their profession and create legible financial statements as they were personally involved in the fraud themselves.
The Principle of Conservatism states that the accounting for a business should be fair and reasonable so that the assets or profits of a business are neither overstated nor understated. In the Bre-X scandal, the Principle of Conservatism was violated because the accounting for the company, Bre-X, was not fair and reasonable as the assets of the company were blatantly overstated. The overstating of the assets affected the investing decisions of investors and brokers, as these individuals analyzed Bre-X’s financial statements and received an incorrect perception of the company’s strength and health. The overstating of the assets led to Bre-X being listed on the TSE and NASDAQ, which, in turn, led to the stock value sky rocketing and soaring to extreme highs that would’ve been something absolutely unprecedented to predict as the company was a penny stock only four years earlier. Overall, the Principle of Conservatism was violated by Bre-X in the fraud due to the overstating of its assets, which led to the massive expansion of Bre-X; in addition, this also led to significant losses to investors when the company crashed when the fraud was revealed.
The Objectivity Principle states that accounting will be recorded on the basis of objective evidence, which means that accountants have to base transactions on real factual evidence, rather than opinions, feelings, or falsified data. The Objectivity Principle was violated during the Bre-X scandal because falsified data was used to record the transaction for the purchase of the land in Busang, Indonesia. The price on the source document for the purchase of the land was not used by Bre-X accountants, as they used a falsified valuation of the land made by a Bre-X insider to record the transaction of the land. This fraudulent recording of the land asset led to the assets of Bre-X being overstated, which led investors to false and ambiguous conclusions when choosing where to invest; the higher asset valuation led more investors to investing into Bre-X, which only led to billions of dollars being lost by investors when the fraud was revealed. Overall, the Objectivity Principle was violated by Bre-X in the fraud due to the purchase of the land asset in Busang being blatantly overstated due to the use of a false asset valuation conducted by a Bre-X insider, rather than the use of the actual amount on the source document for the purchase of the land.
The Cost Principle states that the accounting for purchases must be at the cost price to the purchaser, which appears on the sources document for the transaction, in almost all cases, as there is no place for guesswork of wishful thinking when accounting for purchases. In addition, the Cost Principle states that when there is no source document for a purchase, the item has to be recorded at a fair market value that must be determined by some independent means (ex. third party auditor). The Cost Principle was violated during the Bre-X scandal, because the accountants for Bre-X did not state the value of the land asset that they bought in Busang, Indonesia at the price that they bought it at, as they conjured up falsified evidence and recorded the value of the land asset at a significantly higher asset price than what was paid for it. In addition, the Cost Principle was also because Bre-X should have consulted a third party auditor to evaluate their land asset, rather than using an insider from their own company to value the land. The company insider that evaluated the Busang land used falsified evidence from the Bre-X geologist, Michael de Guzman, to place an unfair market value on the land asset. Overall, the Cost Principle was violated by Bre-X in the fraud due to the value of the land asset in Busang not being recorded at cost price nor a fair market value, as inequitable and unwarranted asset valuation was done by a Bre-X insider.
Who were the auditors? What do auditors do? What role did they play in this fraud?
Auditors are independent certified public accounts that are responsible for examining the financial statements that a company’s accounting department prepares. Auditors are specialized in the testing of financial statements and accuracy within a company, hence, business hire auditors to perform audits to ensure that their financial statements comply with the laws laid out by the government and the Generally Accepted Accounting Principles (GAAPs). An audit is the examination of the accounting records and internal controls of a business to be able to express an opinion about the business’s financial position and results of operation. Subsequent to the audit, an auditor is responsible for providing a written report to the business that contains an opinion as to how the financial statements are prepared and if they comply with Government laws and GAAPs.

The Financial Reporting Requirements For Governmental And Nonprofit Organizations Accounting Essay

Before preparing any financial statements for a Public Health Center, we need to review the financial reporting requirements for governmental and nonprofit organizations.
It is understood that there is a governing authority for regulating the financial reporting on this specific situation. It should be taken into focus and consideration the quality of nonprofit organization financial reporting. Nonprofit and governmental entities’ financial reporting requirements, objective functions, and governance mechanisms are different from those of for-profit firms.
Yetman and Yetman (2004) spelled out Nonprofit Financial Reporting Requirements in details to provide guidelines and appropriate analysis in preparing governmental organizations financial statements that the basic source of publicly available nonprofit financial information is the Internal Revenue Service form 990.2 The 990 contains typical financial statements including a statement of revenues and expenses and a balance sheet, as well as a substantial amount of other information related to the nonprofit’s charitable purpose and activities. IRS regulations determine the form and content of the 990 and provide required accounting rules. In most cases the IRS accounting rules mirror Generally Accepted Accounting Principles, although there are several important differences. All nonprofits with revenues over $25,000 must file the 990 annually. Congressional reports suggest that the intent of the IRS 990 is to provide the public with the necessary information to evaluate the performance of a nonprofit, and that the IRS 990 is the primary source of publicly available nonprofit financial information (Joint Committee on Taxation 2000). To ensure and gear carefully the wide dissemination of 990 information, the IRS Statistics of Income (SOI) division sponsors the Urban Institute to collect and make freely available 990 data for virtually all nonprofits.
Subsequently, nonprofits do not have investors in the traditional sense, in some cases donors act as investors in that they providing funds in exchange and in lieu for some measure of non-wealth type utility. In fact some distinction of donors are handed in through contractual authority to oversee the existing nonprofit recipients within a specific organization standards.
The Governing Authority for Regulating Financial Reporting of both Governmental and Non-Profit Organization
The Internal Revenue Service is the primary federal organization charged with overseeing the financial reporting activities of nonprofit organizations. Both the legal governance metric (LEGAL) and the reporting governance metric (REPORT) vary across states but do not vary across nonprofits within a state, nor do they vary across time (because they are based on current laws). Because of this, we restrict all analysis using LEGAL and REPORT to a single year. Another source of nonprofit regulation arises from the use of a Certified Public Accountant (CPA) to prepare the IRS 990. Many nonprofits have outside CPAs prepare their IRS Form 990, while others prepare the forms in-house. IRS Circular 230 governs the duties of external CPAs in preparing IRS forms, and failure to follow those guidelines can result in suspension to practice and possible civil or criminal penalties (Yetman and Yetman, 2004).

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Because nonprofits do not have access to traditional capital (stock) markets, debt financing through municipal bonds is one way that nonprofits can acquire large amounts of funds for capital projects. Technically nonprofits do not issue municipal bonds directly, but rather receive the proceeds of bond offerings sponsored by various state and city municipalities. Although the issuance is conducted through under the auspices of a governmental agency, the ultimate liability. Furthermore, the issuing municipal bonds subjects nonprofits to intensive financial reporting oversight from several sources. The Securities and Exchange Commission enforces the provisions of the Securities and Exchange Act of 1934 rule 15c2-12, which requires that before issuance the firm must file a “final official statement,” which is a comprehensive set of documents prepared by the issuer containing the terms of the issue and extensive financial and operating disclosures. The SEC also enforces the annual reporting requirements of rule 15c2-12, which mandates that all municipal bond issuers file annual financial and operating reports according to rules promulgated by the Municipal Securities Rulemaking Board, which was established in 1975 by Congress. The Board’s purpose is to develop rules regulating securities firms and banks involved in underwriting, trading, and selling municipal securities and is overseen by the SEC. The Board, which is composed of members from the municipal securities dealer community and the public, sets standards for all municipal securities dealers for the bonds resides with the nonprofit (Yetman, 2004 and other authors).
Yetman and Yetman (2004) anchoring discussions on Schipper and Vincent concepts specifically articulated the existing elements concerning the content of reporting as what the Congressional reports suggest that the 13 intent of the form 990 is to provide the public with the necessary information to evaluate the performance of a nonprofit (Joint Committee on Taxation 2000), and the Financial Accounting Standards Board (FASB) espouses a similar intent for the financial statements of both for-profit and nonprofit organizations (Concepts Statement No. 1 and 5, FASB 1978, para. 34 et. Seq.). The standards applied by both of these regulators imply a decision usefulness context to financial reporting for both the IRS 990 and nonprofit financial statements.
The primary concern regarding government financial reporting at this time was to demonstrate legal compliance, including both restricted asset and budgetary accountability and the ultimate outcome of the budget process is a determination of how financial resources will be raised (inflows of expendable financial resources) to finance and pay for the activities of the government (outflows of expendable financial resources) for the period. The conceptual underpinnings and achoring of modified accrual accounting are rooted primarily in an effort to present a logical matching of governmental fund expenditures with the revenues and other financial resources raised to pay for those expenditures; such as, that the governmental fund balance sheet reports all financial assets Financial assets
Claims on real assets.
….. Click the link for more information.  and related liabilities that are payable in the current period from the portion of financial assets that can be used to pay the related liabilities of the period; the operating statement operating statement
See income statement.
….. Click the link for more information. essentially reflects the extent to which financial resources that became available; and expenditures for materials and supplies and prepaid items are permitted to be reported as expenditures either in the period purchased or in the period used. (Gale Cengage Learning, 2010).
Thus, financial reporting preparation by state and local governments is vital in bracing and considering social, environmental, political, economic decision-making and in the genuine assessment of accountability. Moreover, the governing authority for regulating financial reporting of both non-profit and governmental organizations exists to monitor, evaluate, and account the on-going status or condition of such organization under certain financial circumstances considering elements such as, the actual financial output with the legally adopted budget, the financial circumstances and conditions’ output of operations, the compliance of existing operation with finance-laws, rules, and regulations, and the evaluation of efficiency and effectiveness.
Financial reporting is definitely essential yet crucial. Nobody can simply play with accountability with its corresponding obligations and responsibility showing what’s really happening and what’s really needed and how the expenses and financial working elements inside the organization roll their sheets. Thus, it is expected organization has to manage financial elements within the cash flow of the evolving operation in careful emphasis and implementation which should be manifesting accordingly to certain financial controls, and governing state laws and regulations understanding legal procedures and generate financial strategic plan to ensure financial condition’s security and integrity within the operation of the organization itself. Thus, the greatest challenge is how skillful the organization is in managing its cash flow without sacrificing to meet and achieve the organization’s set goals and objectives.
Anonymous, Gale Cengage Learning (2010). Modified Accrual: Decision Useful &
Accountability Centered. Web. Retrieved 12 Oct., 2010 from
McNamara, Carter. Basic Guide to Non-Profit Financial Management. Retrieved 12 Oct.,
2010, from
Yetman, Michelle H. & Yetman, Robert J. (2004). The Effects of Governance on the
Financial Reporting Quality of Non-Profit Organizations. Web. Retrieved 12 Oct.,

Essay On Corporate Social Responsibility Accounting Essay

The term stakeholders means a party that can effect or be effected by the actions of the business as a whole and they are the group of members without whose support the organisation cannot exist or they are the interested parties who is keen to know what the business is doing. In this situation the stakeholder is Steve Morgan who is the controller of the Newton Industries and is interested in production cost reports.
What are the ethical issues involved in this situation?
Steve Morgan is involved in the ethical issue as he did not inform the management that the advertising cost is expensed in the current period the net income wouldn’t be overstated and this would help the financial managers to make decisions and maintain effective control over resources.
What would you do if you were Steve Morgan ?
Managerial Accounting or management accounting is a set of practices and techniques aimed at the providing managers with financial information to help them make decisions and maintain effective control over corporate resources.
So, if I was in Steve Morgan’s position I would had recorded the advertising cost as expense in the current period , so as to not to overstate net income.
BYP 3-6
Who are the potential stakeholders involved in this situation?
The term stakeholders means a party that can effect or be effected by the actions of the business as a whole and they are the group of members without whose support the organisation cannot exist or they are the interested parties who is keen to know what the business is doing. In this case the potential stakeholders are Jan Wooten who is department head in the Moulding Dept. And Tony Ferneti who is quality control inspector of moulding department and are interested in saving the company’s money.
What alternatives does Tony have in this situation? What might the company do to prevent this situation from occurring?
Tony has two alternatives in this situation, first alternative is that pass through the inspection and on to the Assembly Department all the units that had defects non-detectable to the human eye. The second alternative is that Tony can reject all the units that had defects.
The company can lower the wages of the employees so that the employees will be extra vigilant and will be careful. Also the company could use the extra money after lowering the wages in providing the employees a better training and could avoid such situation in the future.
Part B: Essay on corporate social responsibility
Corporate social responsibility (CSR) in business is related to the obligation of companies and other business organizations to increase their positive influence and reduce their negative activity toward society. In that sense, while ethics is a matter for each individual in the business field, social responsibility is related to the influence of an organization’s business decisions on society. One of the most significant principles on which modern business is based is that of an organization based on responsibility. Organizations must take responsibility for their role in society.
Corporate Social Responsibility is becoming an increasingly important activity to businesses nationally and internationally. As globalization accelerates and large corporations serve as global providers, these corporations have progressively recognised the benefits of providing CSR programs in their various locations. CSR activities are now being undertaken throughout the globe.
The rationale for CSR has been articulated in a number of ways. In essence it is about building sustainable businesses, which need healthy economies, markets and communities.(megatrend)
The key drivers for CSR are:
Enlightened self-interest – creating a synergy of ethics, a cohesive society and a Sustainable global economy where markets, labour and communities are able function well together.
Social investment – contributing to physical infrastructure and social capital is increasingly seen as a necessary part of doing business.
Transparency and trust – business has low ratings of trust in public perception. There is increasing expectation that companies will be more open, more accountable and be prepared to report publicly on their performance in social and environmental.
Increased public expectations of business – globally companies are expected to-do more than merely provide jobs and contribute to the economy through taxes and employment.”
The concept of corporate social responsibility has been standardized and today represents an integral part of integrated management systems. The principles connected with existing definitions of corporate social responsibility consist of the following: taking part in community life, accountability, sustainability, transparency, ethical behaviour (without corruption), honesty and inclusion. Socially responsible companies adhere to the “triple result” approach, keeping in mind the social, economic and environmental influence of their business operations. (Weygand, kimmel & kieso. 6th Ed, p 21)

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Framework of CSR
CSR is important, as it’s a starting point towards building CSR into management control systems. The different phases are also named steps. This is done because the framework works as a continuum where different steps follow one another and a step cannot be skipped when heading to a system working in day-to-day work and helping to reach set goals. In step three the management control system is shaped and it represent the processes, systems and tools by which the management guides the organization’s and its employees’ behaviour to fulfil the set strategy and targets. To facilitate management actions management should get proper reporting of the step three. After attaining CSR outcomes these outcomes can be reported to the stakeholders via CSR reporting. The steps will be used to analyze the empirical results of the study. The stage of alignment of CSR into management control systems in the case companies will be analyzed according to this framework. In this internal control the role of accounting plays a very important concept.
Corporate social responsibility and important of accounting –
• CSR is a concept whereby companies integrate social and environmental concerns into their business operations and in their interaction with their stakeholders on a voluntary basis.
• CSR is “the process by which managers within an organization think about and discuss relationships with stakeholders as well as their roles in relation to the common good, along with their behavioural disposition with respect to the fulfilment and achievement of these roles and relationships”
Several concepts related to CSR, which apply to the accounting areas:
Environmental Management Accounting,
Social Environmental Accounting and
Environmental Reporting or Social Responsibility Accounting.
These concepts link CSR to the accounting system, arguing for the importance of such aspects in the work of accountants.
Very well informed businesses and non-profit organizations environment seems aware of the importance of good CSR practices. CSR developed a portal presenting and advertising very well the experience of CSR and international organizations in this area. Such companies in our country have initiated several projects and initiatives.
CSR-related concepts influence significantly the accountancy profession for example, Environmental Management Accounting is the management of environmental and economic performance via management accounting systems and practices that focus on both physical information on the flow of energy, water, materials, and wastes, as well as monetary information on related costs, earnings and savings. (
Managerial accounting is reflected by both physical information on the use, flows and destinies of energy, water and materials, and monetary information on environment-related costs, earnings and savings sides. It has such application fields as: assessment of annual environmental costs/expenditure, product pricing, budgeting, investment appraisal, calculating costs, savings and benefits of environmental systems, environmental performance evaluation, indicators and benchmarking, external disclosure on environmental expenditures, investments and liabilities. As this shows, and we will further develop, it is then imperative that all parties involved in the accounting domain consider fostering such competencies in accountants, for the overall good of the society.
Managerial Accountability is an international standard for social responsibility, created by Council on Economic Priority Accreditation Agency with the goal of securing an ethical source of products and services. This standard is of a voluntary character and can be applied to any company, regardless of size and branch of operations. Also, the standard can either replace or be a supplement to companies or industries with a specific code of social responsibility.(amfiteatur.economic)
Part C: Essay on budgeting
“Is a formal written statement of management’s plan for a specified future time period, expressed in financial terms. It represents the primary method of communicating agreed-upon objectives throughout the organization. Once adopted, a budget becomes an important basis for evaluating performance. It promotes efficiency and serves as a deterrent to waste and inefficiency”. (Weygandt, Kimmel & Kieso, 6th Ed, p 384)
Some employees will question the need for a budget. The procedure of budget preparation is at times seen as difficult, and it is not constantly clear how the attempt that is required leads to any fruitful production. Furthermore, budgets can be seen as imposing constraint that is hard to live with and establish goals that are difficult to meet.
Despite these dismal remarks, it is very important that organizations carefully plan their financial affairs to attain financial achievement. These plans are normally expressed as “budgets.” A budget is detailed financial plans that quantify future expectations and actions relative to acquiring and using resources. (Principles of Accounting)
In small organization, formal budgets are an unusual object. The individual management/owners likely manage only by reference to a common mental budget. The person has a good sense of estimated sales, costs, financing, and asset needs. Each operation is under direct oversight of this person and confidently she or he has the capacity to keep things on a logical course. When things don’t go well, the management/owners can normally take up the slack by not taking a pay check or engage in some other form of financial requirement. Of course, much small business eventually is unsuccessful anyway. Explanation for unsuccessful are several and varied, but are often pinned on “undercapitalization” or “insufficient resources to sustain operations.” Many of these post-mortem assessments reflect a failure to adequately plan! Even in a small company, a reliable business budget/plan can often result in anticipate and avoiding terrible outcomes.
Medium and big organization consistently relies on budgets. This is likewise true in business, government, and non-profit organization. The budget provides a formal quantitative phrase of opportunity. It is an essential aspect of the planning and control process. Without a budget, an business will be highly unproductive and ineffective. (Principles of Accounting)
Advantages of Detailed Budgeting:
There are several advantages of detailed budgeting for business which are.
First of all creating a budget is a long term perspective so it enables to think in a long term and moves away from making short term goals. It also allows thinking long term financial position and profitability of a business no matter if the planned budget doesn’t successes. (Accounting Tools)
Making a detailed business budget allows to pin point where the company generates it most of the revenue as in many cases it is easy that the management looses the most profitable aspect. It forces management to consider to whether it should let go non productive part of business and which new one to invest in. (Accounting Tools)
Budgeting allows business to think what the key purpose of the business is and to forecast environmental factors that may affect the performance of the business. This forecasting enables to develop strategy to overcome different environmental pressure. (Accounting Tools)
A detailed budgeting allows business to look forward what future cash flows will be required for the expansion of the business and from where to generate funds in order to meet the future growth needs. (Beyond)
Formulating a budget also allows you to evaluate the performance of the business. Where the business is now and where to be and how to get there. It provides step by step information which is helpful in reaching where the business wants to be. Without budget it is very difficult to evaluate the current performance of business. It measures the planned performance with actual which gives a complete and true picture of the business. (Weygandt, Kimmel & Kieso, 6th Ed, p 385)
Budgeting enables managers to decide where to allocate funds as cash are always limited. Whether to invest in fixed assets to increase production for matching future demands or to invest in working capital. It also enables business to decide which asset is worth investing. (Beyond)
A realistic established budget enhances the probability that the business will successes because it contains all the essentials and targets that have to be accomplished and also enables the business owner to according to the planned activities. (Accounting Tools)
In addition detailed budgeting also helps to formulate different department goals and different functional goals. The functionality of all the departments are necessary to run the business mechanism. Basically budget creates a harmony among the entire department prevailing in a particular business. (Principles of Accounting)
A budget is not only useful for owner or managers of business but it is also useful for the investors. Budgets helps investors to check if the business have enough potential and if the business if worth investing. Investors see the budget to find out what are the goals of business and investing in that particular business will maximize the probability of better return in terms of interest. (Accounting Tools)
Budgets are not just useful in comparing your own performance with the planned one but it is also useful in comparing the performance of your business with the overall industry, like what are the labor rate prevailing in the market, what price to charge from customer, what volume to sell in order to get maximum revenue. (Accounting Tools)
A strong budgeting system serves as an effective planning and control tool that allows a business to plan its short term and long term strategy towards achievement of its short term and long term goals, by:
Setting up targets for individual departments of the Company,
Checking and ensuring the availability of necessary resources for the achievement of the said targets,
Streamlining the goals of different departments with that of the organization,
Monitoring the actual performance against the budget,
Adjusting the performance deficiencies by referring back to the budget
Adjusting the budget where required by incorporating the changes in the working environment, and
Continuously planning for effective and better performance.
All in all a budget is a system of governance that enables the management to build up the business by adequately planning its each move in the market and maintain a pro-active approach in its business that serves as a plus point in a competitive business environment if managed effectively and intelligently. (Weygandt, Kimmel & Kieso, 6th Ed, p 385 & 386)

Nature And Purpose Of The Conceptual Framework Accounting Essay

The accounting conceptual framework has been criticized for not providing an adequate basis for standard setting. This inadequacy is evidenced through the FASB’s standards becoming more and more rule-based. Nevertheless, no empirical evidence has been gathered to support the criticisms of the conceptual framework. We analyzed the five qualitative characteristics of accounting information from the conceptual framework in conjunction with an individual’s intention to use/rely on financial statements. Using structural equation modelling, we found that only one qualitative characteristic, reliability, affected a person’s intention to use financial statements. Additionally, it appears that the greatest factor that influences whether an individual rely on financial statements is their familiarity with accounting. Based on our findings, it appears that not only does the conceptual framework need to be altered, but it also needs to be changed to help create principle-based accounting standards that are useful to all people, regardless of their background.

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Criticism has been directed towards the Financial Accounting Standards Board (FASB) for not requiring firms to report information that is interpretable and useful for financial statements users (CICA, 1980). The FASB’s conceptual framework is the core in which all accounting standards are derived. Therefore, the accounting conceptual framework must embody a set of qualitative characteristics that ensure financial reporting grants users of economic statements with sufficient information for assessments. The U.S. financial accounting conceptual framework was established between late 1970’s and early 1980’s. Statement of Financial Accounting Concepts (SFAC) No. 2 (1980) indicates that there are five main qualitative characteristics of accounting information; understandability, relevance, reliability, comparability, and consistency.
Nature and Purpose of the Conceptual Framework
The conceptual frame work has some disadvantages. It is broad based in nature and principles and may not help when actually producing the financial statement. Its standards contents may conflict with those of other boards. This framework, with minor changes, still provides the basis for the FASB’s standard setting today. Statement of Financial Accounting Concepts (SFAC) No. 2 (1980) develops and discusses the qualitative characteristics that make accounting information useful. SFAC No. 2 separates the qualitative characteristics as possessing either user-specific or decision-specific qualities. The overall user-specific characteristic of accounting information is that it must be understandable. Today, the accounting conceptual framework is being blamed for accounting standards becoming rule-based, which leads to the structuring of transactions (Nobes, 2005; SEC 108(d)). In fact, FASB has even acknowledged that the conceptual framework might be inadequate for current accounting standards (AICPA, 2002).
The conceptual framework was formed with the intention of providing the backbone for principle-based accounting standards (Nobes, 2005). However, the Securities and Exchange Commission (SEC) has recently criticized the accounting standards setting board for becoming overly rules-based, which paves the way for the structuring of transactions in the company’s favour (SEC 108(d)). Critics of the framework have stressed that the move towards rule-based standards are a consequence of inadequacies in the accounting conceptual foundation. Nobes (2005) argues that the need for rule-based accounting standards is a direct result of the FASB trying to force a fit between standards and a conceptual framework that is not fully developed. A coherent and strong conceptual framework is vital for the development of principle-based accounting standards and the progression towards convergence in international accounting standards.
However, researchers are unaware of any empirical evidence that supports the criticisms of the current conceptual framework. Additionally, none of the critics have looked at the conceptual framework from the most important viewpoint, the user’s perspective. Therefore, the rationale of this paper is to practically analyze the sufficiency of the conceptual framework, from a user’s perspective, in relation to an individual’s reliance on financial statements for decision making. We developed a survey instrument to analyze an individual’s intention to rely on financial statements using Ajzen’s (1991) Theory of Planned Behaviour. We found that the reliability characteristic of the conceptual framework represented the only significant dimension of a person’s attitude affecting their intention to rely on financial statements. However, the understandability characteristic was approaching significance. Within the context of the theory of planned behaviour, social pressures was not significant influence on the intention to use/rely on financial statements, yet familiarity with accounting was found to significantly influence intention.
The conceptual framework and potential financial statement user’s intentions can be analyzed within the context of Ajzen’s (1991) Theory of Planned Behaviour. Ajzen (1991) indicates that empirical evidence suggests that we can determine an individual’s intention to perform behaviour through analyzing their attitude, subjective norms, and perceived behavioural control. Within this perspective, we adapted Ajzen’s (1991) theory of planned behaviour to an individual’s propensity to rely on accounting financial statements as shown in the figure below (figure 2):
(Draw a figure)
The purpose of this study was to provide an empirical analysis to the criticism against the FASB’s conceptual framework. Our overall results suggest that the current conceptual framework does not adequately align the objectives of financing reporting with the users of financial statements. Nevertheless, available findings have some interesting implications for the conceptual framework and future standard setting. Reliability is the only qualitative characteristic that has a positive statistical significant relationship with intention. The accounting profession is facing a choice between reliability and relevance in financial reporting, as there is an inherent trade-off between reliability and relevance (Paton and Littleton, 1940; Vatter, 1947). Reliable information possesses the characteristic of objectivity and verifiability, which is associated with historical cost accounting. Relevance, on the other hand, pertains to any information that will influence the users’ financial decision.
Many times the most relevant information is often current or prospective in nature. Thus, we cannot have accounting information that maximizes the characteristics of both relevant and reliable because relevant information is not always verifiable. We would have expected to see relevance as a significant factor in users’ intention to use financial statements since the recent accounting standards have moved toward fair value accounting measures, which are considered to be more relevant than reliable information (Ciesielski & Weirich, 2006). However, our results show that reliability is a significant factor. The current accounting curriculum could be the cause of our results since it is rooted in Paton and Littleton’s historical cost approach, which focuses on reliability of information.
In the context of the Theory of Planned Behaviour, we found that familiarity to be a statistically significant factor to an individual’s intention to use financial statements. Thus, as an individual becomes more familiar with financial statements, he or she is more likely to have the intention to use or rely on them when making decision. An ANOVA analysis provides further support for this as it indicates that intention to use or rely on financial statements is significantly different between accounting majors and non-accounting majors. This provides evidence that accounting could be becoming too difficult for individuals who are not proficient in accounting to understand.
It appears that the movement towards rule-based accounting standards could be a contributing cause of this disparity in intention. That is, the accounting standards have become so technical upon their execution that the average reader of accounting can no longer discern the main objective of each financial statement element. This finding is troubling to accounting since it contradicts the primary objective of accounting, which is to offer practical book-keeping information for judgment making. Book-keeping information should be useful for all people who want to use it rather than only being useful to those who understand it. Additionally, under no circumstances, should accounting information provide an advantage to individuals who happen to be experts within the field. Accounting should be a tool and not a barrier
At the-present, the accounting profession is grappling with a problem, which it has identified as the need for a conceptual framework of accounting. This framework has been painstakingly developed over centuries, and it is merely the profession’s task to fine tune the existing conceptual framework because of the need for continual development due to changing conditions. This conceptual framework has never been laid out in explicit terms; consequently, it is continually overlooked. A conceptual framework has been described as “a constitution,” an articulate arrangement of interconnected objectives and rudiments that can guide to reliable standards and that stipulates the character, purpose, and confines of financial book-keeping and fiscal statements.
For many accountants, the conceptual framework project is difficult to come to grips with because the subject matter is abstract and accountants are accustomed to dealing with specific problems. In resolving those problems, accountants may unconsciously rely on their own conceptual frameworks, but CPAs have not previously been called on to spell out their frameworks in systematic, cohesive fashion so that others can understand and evaluate them. It is essential that a framework be expressly established so that the FASB and those evaluating its standards are basing their judgments on the same set of objectives and concepts. An expressly established framework is also essential for preparers and auditors to make decisions about accounting issues that are not specifically covered by FASB standards or other authoritative literature.
It is considered that if the conceptual framework makes sense and leads to relevant information, and if financial statement users make the necessary effort to fully understand it, their confidence in financial statements and their ability to use them effectively will also be enhanced. No one who supports the establishment of a conceptual framework should be labouring under the illusion that such a framework will automatically lead to a single definitive answer to every specific financial accounting problem. A conceptual framework can only provide guidance in identifying the relevant factors to be considered by standard setters and managers and auditors in making the judgments that are inevitable in financial reporting decisions.
A Classical Model of Accounting: The Framework Expanded
Historically, the particularized information, which constituted the emergence of accounting, was embedded in a framework for control of human behaviour. With the advent of exchange replacing a sustenance society, and with exchange ultimately producing a private economy, accounting derived its second, and in modern times considered its most important, function as a planning instrument. The classical model simply states that behavioural patterns do exist in the structural development of accounting; that is, given a stimulus there will be a response which is direct reaction (an expected reaction) to that stimulus. One can relate this model to the classical model in economics, in which supply and demand for a commodity react in an expected manner due to a change in price. Figure 3 is a geometric illustration of the classical model. The special features of the model are:
(a) Stimulus (S) = Demand; Response (R) = Supply
(b) Equilibrium (E) = Stimulus = Response
(c) Environmental Condition (EC) = Price
(d) Accounting Concept (AC) = Product
A Test of the Validity of the Model
If the classical model does exist in accounting, the historical observations (see table I) should then bear testimony to its existence. The evidence to support this model is purely historical. However, no parallel should be drawn between this thesis (stimulus/Response) and Toynbee’s (1946, 88) line of inquiry: “Can we say that the stimulus towards civilization grows positively stronger in proportion as the environment grows more difficult?” Consequently, the criticism directed at his work should not be considered even remotely as applicable to this inquiry (Walsh 1951, 164-169).On the other hand, only in the extreme can the accusation levelled at Kuhn [1962] be directed here, that the conceptual framework (classical model of accounting) as presented “may subsume too many possibilities under a single formula (Buchner 1966, 137).” More appropriately, this study is undertaken along the lines suggested by Einthoven (1973, 21): Accounting has passed through many stages: These phases have been largely the responses to economic and social environments. Accounting has adapted itself in the past fairly well to the changing demands of society. Therefore, the history of commerce, industry and government is reflected to a large extent in the history of accounting.
What is of paramount importance is to realize that accounting, if it is to play a useful and effective role in society, must not pursue independent goals. It must continue to serve the objectives of its economic environment. The historical record in this connection is very encouraging. Although accounting generally has responded to the needs of its surroundings, at times it has appeared to be out of touch with them. The purpose of this line of inquiry is to put into perspective concepts which have emerged out of certain historical events. (In this treatise, accounting concepts are considered to be interlocking with accounting measurement and communication processes; thus, whenever the term concept is used herein, it is to be understood that accounting measurement and communication processes are subsumed under this heading.)
These concepts collectively constitute, or at least suggest, a conceptual framework of accounting. The classical model is postulated as follows: For any given environmental state, there is a given response function which maximizes the prevailing socio-economic objective function. This response function cannot precede the environmental stimulus but is predicated upon it; when such response function is suboptimal, the then existing objective function will not be maximized. In a dysfunctional state, a state in which environmental stimulus is at a low level – a level below pre-existing environmental stimuli, disequilibrium would ensue. In any given environment, the warranted response may be greater or less than the natural or actual response.
When environmental stimuli cease to evoke response, then the socio-economic climate will be characterized by stagnation as the least negative impact of disequilibrium conditions, and decline when such environmental stimuli are countercyclical.
Stage 1 – In this period, (1901 to 1920) the environmental stimulus was corporate policy of retaining a high proportion of earnings [(Grant 1967, 196-197); (Kuznets 1951, 31); (Mills 1935, 361,386-187)]. This period is the beginning of corporate capitalism. The term ‘corporate capitalism’ is used because it emphasizes the role in capital formation which corporations have ascribed to themselves. Hoarding of funds by corporations has reduced the role and importance of the primary equity securities market. The resource allocation process has been usurped by corporations (Donaldson 1961, 51-52, 56-63). The implication of such a condition is accentuated in the following statement: “It is the capital markets rather than intermediate or consumer markets that have been absorbed into the infrastructure of the new type of corporation.” (Rumelt 1974, 153).
The hard empirical evidence of this condition was revealed by several tests of the Linter Dividend Model, which maintains that dividends are a function of profit, and are adjusted to accommodate investment requirements [(Kuh 1962, 48); (Meyer and Kuh 1959, 191); (Brittain 1966, 195); (Dhrymes and Kurz 1967, 447)]. Given the new role assumed by the corporation in capital formation, the investment community (investing public) became concerned with the accounting measurement process. The accounting response was verifiability (auditing) – to demonstrate the soundness of the discipline. Productivity of existing measurements had to be verified to satisfy the investors and creditors. The Companies Act 1907 required the filing of an audited annual balance sheet with the Registrar of Companies [(Freer 1977, 18); (Edey and Panitpadki 1956, 373); (Chatfield 1956, 118)]. Thus, auditing became firmly established. The function of auditing measurements is the process of replication of prior accounting.
Accounting is differentiated from other scientific disciplines in this aspect of replication. Replication is a necessary condition in sound disciplines; however, replication is generally undertaken in rare instances. In accounting, on the other hand, replication is undertaken very frequently for specified experiments – business operations – at the completion of the experiments – business (operating) cycle. These experiments – business operations, cover one year; at the end of the year, the experiments are reconstructed on a sampling basis. Auditing is the process by which replication of accounting measurements are undertaken. Publicly held and some privately held corporations are required to furnish audited annual financial statements which cover their business activities on an annual basis.
Stage 2- This period, (1921 to 1970) witnessed the reinforcement of corporate retention policy. This condition shifted the emphasis of the investor to focus on the Securities market in the hope of capital gains, because of the limited return on investment in the form of dividends. Indubitably, investors’ concern was shifted to market appreciation through stock price changes reflecting the earnings potential of the underlying securities (Brown 1971, 36-37, 40-41, and 44-51).
With the securities market valuation of a company’s share (equity) inextricably linked to the earnings per share, the emphasis is placed on the dynamics of accounting as reflected in the income statement. The Companies Act of 1928 and 1929 explicitly reflect this accounting response by requiring an income statement as a fundamental part of a set of financial statements [(Freer 1977, 18); (Chatfield 1974, 118)]; although an audit of such statement was not explicitly stipulated, it was implied. The accounting response of this period is extension of accounting disclosure [(Chatfield 1974, 118); (Blough 1974, 4-17)].The Wall Street Crash of 1929 and subsequent market failures constitutes the environmental stimulus. In the U.S.A., the Securities Act of 1933 and then the Securities and Exchange Act of 1934 were enacted, providing for a significant involvement of the government in accounting.
Stage 3- This period is characterized by the social awareness that business as well as government must be held socially accountable for their actions. Business can transfer certain costs to other segments of society, thus business benefits at the expense of society; and government can not only squander hard earned dollars but through its policies affect adversely the welfare of various segments of society.
This awareness is epitomized in the thesis posited by Mobley [1970, 763]: “The technology of an economic system imposes a structure on its society which not only determines its economic activities but also influences its social well-being. Therefore, a measure limited to economic consequences is inadequate as an appraisal of the cause-effect relationships of the total system; it neglects the social effects.”
The environmental stimulus of corporate social responsibility evoked the accounting response of socio-economic accounting – a further extension of accounting disclosure. The term socio-economic accounting gained prominence in 1970, when Mobley broadly defined it as “the ordering, measuring and analysis of the social and economic consequences of governmental and entrepreneurial behaviour.” Accounting disclosure was to be expanded beyond its existing boundaries – beyond the normal economic consequences “to include social consequences as well as economic effects which are not presently considered” (Mob1ey 1970, 762).
Approaches to dealing with the problems of the extension of the systemic information are being attempted. It has been demonstrated that the accounting framework is capable of generating the extended disclosures on management for public scrutiny and evaluations [(Charnels, Co1antoni, Cooper, and Kortanek 1972); (Aiken, Blackett, Isaacs 1975)]. However, many measurement problems have been exposed in this search process for means to satisfy the systemic information requirement of this new environmental stimulus [(Estes 1972, 284); (Francis 1973)]. Welfare economics, as a discipline, has always been concerned with the social consequences of governmental and entrepreneurial actions, but the measurement and communication problems are, and always have been that of the discipline of accounting (Linowes 1968; 1973).
The Conceptual Framework: A Continuing Process
Presented above, the stimulus/response framework – exhibiting structural adequacy, internal consistency and implemental practicality – has demonstrated, unequivocally, its effectiveness over the centuries. The systemic information of financial accounting is the connective tissue of time in a financial perspective. The systemic information of managerial accounting is non-connective, but rather reflects events in a decision-making perspective. This can be best illustrated in the table below:
(Draw a table)
The process of concept-formation is a special type of learning. The formation takes time and requires a variety of stimuli and reinforcements. The process is never fully determinate for even when the concept is well, it can suffer neglect or inhibition and it can be revived by further reinforcement or modified by new stimulation (Emphasis added.) (Meredith; 1966, 79-80). A body of concepts and interlocking measurement and communication processes (types of information – stocks and flows; constraints on information – allowable values and methods of measurement; media of communication – quantitative and qualitative) has been developed over the centuries.
This set of concepts and interlocking measurement and communication processes has emerged as responses to specific stimuli at specific points in time to satisfy specific information needs. It is this body of concepts and interlocking measurement and communication processes, which is subject to amplification and modification that constitutes the conceptual framework of accounting. Possibly, with other modifications or amplifications deemed necessary, the conceptual framework as presented above can serve as an “expressly established framework” to enable “preparers and auditors to make decisions,” which would conform and be upheld, “about accounting issues that are not specifically covered by FASB standards or authoritative literature.”
A conceptual framework is necessary because in the first place, to be constructive, paradigm setting must develop and connect to a reputable body of perceptions and objectives. A severely developed theoretical outline should facilitate the FASB to issue additional functional and reliable standards in due course. A coherent set of principles and regulations should be the outcome, since they would be constructed upon a similar basis. The framework should augment fiscal statement users’ indulgence of and self-assurance in economic reporting, and it has to improve comparability amongst companies’ fiscal reports. Secondly, latest and emerging realistic problems ought to be more rapidly unravelled by reference to an existing outline of fundamental supposition. It is complicated, if not unfeasible, for the FASB to recommend the appropriate accounting action promptly for circumstances like this. Accountants in practice, nevertheless, ought to resolve such exertions on a routine basis.
With the application of excellent verdict and with the facilitation of a commonly acknowledged conceptual scaffold, practitioners may discharge certain options promptly and then centre their attention on a tolerable dealing. Over the years various associations, commissions, and concerned persons developed and printed their personal theoretical frameworks. However, no particular framework was unanimously acknowledged and relied on practically. Identifying the necessity for a commonly acknowledged structure, the FASB in 1976 initiated effort to construct a conceptual structure that would possibly be a foundation for setting book-keeping principles and for reconciling fiscal reporting disagreements.
The FASB has given out six Statements of Financial Accounting Concepts that recount to monetary reporting for commerce schemes. These include: 1, “Objectives of Financial Reporting by Business Enterprises,” that presents objectives and intentions of book-keeping. 2, “Qualitative Characteristics of Accounting Information,” that inspects the descriptions that make book-keeping information helpful. 3, “Elements of Financial Statements of Business Enterprises,” that offer descriptions of objects in economic statements, for instance, revenues, assets, expenses and liabilities. 4, “Recognition and Measurement in Financial Statements of Business Enterprises,” that lays down elementary acknowledgment and dimension standards and direction on the kind of information that should be officially integrated into economic assertions and at what time. 5, “Elements of Financial Statements,” which substitutes number 3 and increases its extent to comprise non-profit institutes.6, “Using Cash Flow Information and Present Value in Accounting Measurements,” that gives a structure for using probable expectations of cash flows and outline principles as a foundation for measurement.
The figure below is an overview of the conceptual framework.
In the initial stage, the purposes classify the aspirations and rationale of book-keeping. Ideally, book-keeping principles developed with accordance to a theoretical structure will upshot in book-keeping reports that are extra helpful. At the subsequent stage are the qualitative descriptions that make book-keeping information functional and the essentials of monetary report, that is, liabilities, assets, among others. In the third stage are the dimension and acknowledgment perceptions employed in instituting and affecting book-keeping principles. These conceptions include suppositions, ideologies, and restrictions that illustrate the current reporting atmosphere.
First Level: Basic Goals
The major goals of monetary reporting are to give information which is: (1). Helpful to those concerned with the creation of savings and credit judgment and have a sensible perception of commerce and financial performance. (2). Useful to current and prospective financiers, creditors, as well as other users in gauging the quantities, instances, and ambiguity of prospective cash flows and (3). Concerns financial capital, claims to such possessions, and the adjustments in them. The goals consequently, begin with a broad concern regarding information that is valuable to financier and creditor assessments. That apprehension constricts to the financiers’ and creditors’ concern in the outlook of accepting cash from their investments or credits to commerce ventures. Ultimately, the goals centre on the monetary declarations that provide information useful in the assessment of prospective cash flows to the business enterprise. This advancement is known as judgment effectiveness. It has been said that the golden rule is the central message in many religions and the rest is elaboration.
Similarly, decision usefulness is the message of the conceptual framework and the rest is amplification. In giving information to users of monetary reports, general-purpose financial statements are prepared. These reports give the most helpful information feasible at negligible expenditure to diverse consumer groups. Principal to these goals is the conception that consumers require logical acquaintance of commerce and economic book-keeping issues to comprehend the facts contained in economic reports. This fact is essential. It implies that in the groundwork of monetary statements, a stage of rational proficiency on the part of consumers can be alleged. This has an effect on the method and the scope to which data is accounted for.
Second Level: Fundamental Concepts
The objectives of the first level are concerned with the purposes and intentions of book-keeping. Between the second and third levels, it is essential to give particular theoretical construction blocks that elucidate the qualitative descriptions of book-keeping knowledge and describe the essentials of monetary reports. These theoretical construction blocks outline a connection involving the why of book-keeping (the goals) and the how of book-keeping (acknowledgment and capacity).
Qualitative Descriptions of Book-keeping Facts
Deciding on a suitable accounting technique, the quantity and kinds of facts to be revealed, and the layout in which data ought to be presented entails establishing which option provides the most helpful information for assessment making intentions (judgment convenience). The FASB has recognized the qualitative descriptions of book-keeping facts that differentiate enhanced (extra valuable) facts from substandard (less valuable) facts for assessment creation intentions. Additionally, the FASB has acknowledged particular restrictions (“cost-benefit and materiality”) as a component of the conceptual structure. The descriptions might be analysed as a hierarchy.
Assessment Creators (Users) and Understandability
The makers of judgement differ extensively in the nature of assessments they formulate, the way they formulate these assessments, the facts they already have and any other relevant information that they may acquire from their own trusted sources, and their aptitude to process the facts. For knowledge to be helpful there ought to be a correlation (relationship) involving these consumers and the judgment they create. This connection, understandability, is the eminence of facts that authorizes realistically knowledgeable users to distinguish its connotation. To demonstrate the significance of this connection; suppose that IBM Corp. gives a three-month’ income statement (interim statement) that illustrates temporary income way down. This statement gives appropriate and dependable facts for assessment creation intentions. A number of users, upon evaluation of the statement, choose to retail their stock. While others do not comprehend the content and importance of the report, they are astonished when IBM proclaims a lesser year-end share and the worth of the stock turns down. Therefore, even though the facts presented were exceedingly appropriate and consistent, it was futile to those who did not comprehend it.
Prime Qualities: Reliability and Relevance
Importance and dependability are the two major virtues that make book-keeping information helpful for assessment making. As assured in FASB Concepts Statement No. 2, “the qualities that distinguish ‘bet

The Characteristics Of Financial Statement Accounting Essay

The main purpose of this assignment is to determine the five types of accounting users, their needs for Continental Limited financial statement, prepared an income statement and balance sheet with necessary working for Continental Limited for year ending 31 Dec 2010 for the internal use, prepared the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in accepted format for external reporting or publication and, an appropriate accounting ratios for year ending 31 Dec 2010 will be prepared base on income statement and balance sheet which done on task 2 and task 3. Last, industry averages provided to access profitability and liquidity of Continental Limited will be compared.

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Firstly, the accounting users can be categories into internal users and external users. Internal users includes of creditors, suppliers, investors, tax authorities, government agencies, customers, and financial analysts or adviser. Internal users are the users that inside or within an organization, it is usually includes of managers, employees, and shareholders. Next, the 5 characteristics of financial statement is comparability, reliability, timely, relevance, and accuracy.
Table of Content Pages
Introduction 3
Introduction to task 1 4
The 5 types of accounting users and their needs. 4-5
The 5Characteristics of Financial Statement 6-7
Conclusion for task 1 7
3.0 Introduction for task 2 8
3.1 The process of preparing income statement and balance sheet for 8-16
Continental Limited
3.2 Conclusion for task 2 16
4.0 Introduction to Task 3 17
4.1 Classify expenses into contribution cost and Administrative expenses. 17-20
4.2 Conclusion for task 3 20
5.0 Introduction for Task 4 21
5.1 Calculation of accounting ratio 22-23
5.2 Comparison between Continental Limited and Industry Averages to Assess 24
5.3 Comparison between Continental Limited and Industry Averages to Assess 25
5.4 Conclusion for task 4 26
6.0 Conclusion and recommendation 27
7.0 Reference 28-29
Accounting is a system where an organization uses to record all the business transaction. It can help organization to analysis their business performance or make any business decision. According to Michael Russell, he demonstrates that account is a recording of financial or money transactions.
In task 1, the five types of accounting users and their needs for Continental
Limited financial statement will be defined. Besides, the five regulatory characteristics of the financial statements that help to provide useful information to those accounting users will be explain too. Accounting users is the people who need accounting information to make decisions, invest, planning and budgeting.
In task 2, an income statement and balance sheet with necessary working for Continental Limited for year ending 31 Dec 2010 for the internal use by company directors and management will be prepared. Income statement can help organization to note down the expenses and profit and it usually prepared for 1 time in years.
In task 3, the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in accepted format for external reporting or publication will be prepared. Which is means that after the income statement and balance sheet of Continental Limited prepared, it will be shown to the public or outsiders for external reporting.
In task 4, an appropriate accounting ratios for year ending 31 Dec 2010 will be prepared base on income statement and balance sheet which done on task 2 and task 3. Next, the industry averages provided to access profitability and liquidity of Continental Limited will be compared.
2.0 Introduction for Task 1
In task 1, 5 types of accounting users and their needs for the financial statement of Continental Limited will be discussed. Next, the 5 regulatory characteristics of these financial statements that will provide useful information to the users will also be defined in this task.
2.1 The 5 types of accounting users and their needs.
Users of accounting can be categories into external users and internal users. External users are the users outside of the organization which includes of creditors, suppliers, investors, tax authorities, government agencies, customers, and financial analysts or adviser. Internal users are the users that inside or within an organization, it is usually includes of managers, employees, and shareholders.
The first type of accounting users is managers of the company. Manager is a person who in charge in overseeing and manage all the activities of others working which includes of planning, organizing, leading and controlling. Accounting information is needed to a manager to know that whether the organization are earning or losing. Accounting information also helps managers in making business decision because it can let manager know that the current financial situation of an organization. Besides, it also helps managers to know how much their customers owe and how much they owe to their suppliers. Accounting information also helps managers in organization budgeting process by know the financial situation of the organization and allocate the money to each department wisely. Accounting information are important to managers to ensure their business are managed efficiently and effectively.
The second type of accounting users is suppliers or creditors. Suppliers are the person who provide or supply products or services and in return get an agreed payment. But usually suppliers didn’t have proper communication and less interact among each others. Suppliers need to know an organization accounting information to know the current financial situation of an organization whether the organization able to pay the debts that the organization owe. Supplier also includes of money lenders such as bank or landlord. So, if they want to lend money to the organization, they had to check the current financial situation to make sure they will be able to pay back in future.
The third type of accounting users is investors. The people who wish to invest to an organization with expectation to get back reasonable profit in return are known as investors. So, they need to know about the organization account information to measure the performance of the organization and see whether it is worth to invest or might bring loss to the investors
The forth type is the employees of the organization. Employees is the people who are recruit by the organization and use to provide products and services and get salary in return. They must know the account information of an organization to insure employee’s benefits or pension funding is able to pay to them. The fifth type is the shareholders or owners of the company. They are the boss of the company, so they were needed to know the performance of the organization and determine the future plan. Besides, they also need to know the accounting information to know how much they can withdraw as dividend payment.
So, these are the five types of accounting users that use financial information to fulfill their different types of needs.
2.2 The Characteristics of Financial Statement
Financial statement is a document that use to record down all the business transaction or the organization financial activities. Financial statement are includes of trial balance sheet and income statement.
The first characteristic of financial statement is relevance. Relevance is use to generate more information to helps all accounting users in decision making. It can help accounting users to predict future outcome such as profit or loss. To ensure the accounting information are accurate, so those financial account prepare based on accounting concepts and policies present must be relevant which is capable of influencing the economic decision of the users.
The second characteristic of financial statement is timely. Timely is referring to the information which is present or past. So that the accounting information that accounting users received are trustworthy and useful in helping them make any decision. If the account information not prepared to provide information in time, it will affect the decision making of accounting users which might cause loss.
The third characteristic of financial statement is accuracy. Accuracy is about how preciseness of the financial statement of an organization that provides many important information to all accounting users. If the financial statement are not accurate or made in past time, it may cause many problem to an organization in planning their future activities and affect the decision making of accounting users.
The next characteristic is reliability. Financial statement must be reliability to make sure that it can fulfill accounting user’s needs. A financial statement is reliability when it able to reflects the substance of transaction to present faithfully and truly what has already happened. Next is the financial statement are done free from bias and it is neutral. Last, the financial statement must in prudent and realistic where there is any uncertainty.
The last characteristic of financial statement is understandability. A financial account should be prepare in a condition which easy to understand by others that have knowledge or experiences in business, accounting and those economics activities.
So, these are the five characteristic of a financial statement that an organization should revise when preparing the company business financial accounts.
2.3Conclusion for task 1
In my conclusion, there are many types of accounting users that use account to fulfill their need. Their needs includes of making decision, invest, giving loan and know the situations of the organization. Besides, there are also 5 types of criteria of financial statement that an organization should revise when they preparing financial statement.
3.0 Introduction for task 2
In task 2, the income statement and the balance sheet of Continental Limited for the end of 31 December 2010 will be prepared. It will be prepared in an accepted format for the needs of external reporting and publication.
3.1 The process of preparing income statement and balance sheet for Continental Limited
(A)Closing stock should be recorded at cost or net resale value which one is lower. Since cost RM65000 (B)
Cash Account
Sales 5000 Purchase 4000
Stationery 700
Electricity 300
5000 5000
Sales in trading account of income statement
=RM360000 + RM5000=RM365000
Purchase in trading account of income statement
Stationery as expense put in profit loss account of income statement=RM700
Electricity & water in profit loss account of income statement= RM7000+RM300=RM7300
Sales commission as expense put in profit loss account of income statement
=RM18000 (paid from trial balance) +RM1500 (accrued at end of year) =RM19500
Then, the accrued sales commission RM1500 is recorded under current liability in balance sheet.
Office salaries as expense put in profit loss account if income statement.
=RM28000 (paid from trial balance) -RM2000 (prepaid at the end of year)=RM26000
Then, prepaid office salary RM2000 is recorded under the current asset in balance sheet.
Debtor Account
Balance B/D 75000 (-) Bad debts 5000
Balance C/D 70000
75000 75000
Balance B/D 70000
Bad debts account
Debtor 5000 P/L account 5000
Provision for bad debts closing balance =10% x Debtor closing balance RM70000= RM7000
Provision for bad debts account
31 Dec 2010 Closing Balance C/D 7000 1 Jan 2010 Opening Balance B/D 5000
Increase different 2000
7000 7000
1 Jan2011 Balance B/D 7000
Vehicles account
Balance B/D 300000 Vehicles disposal a/c 50000
Balance C/D 250000
300000 300000
Balance B/D 250000
Provision for depreciation on vehicle account
Vehicle disposal account 12500 1 Jan 2010 Opening Balance B/D 60000
31 Dec 2010 Balance C/D 60000 Depreciation as expense put in
P/L account 12500
72500 72500 1 Jan 2011 Balance B/D 60000
Vehicle disposal account
Vehicle cost sold 50000 Provision for depreciation on vehicle sold 12500
Proceed from disposal of vehicle 35000
Difference for loss on disposal of vehicle 2500
50000 50000
Provision for depreciation on premises account
Balance C/D 54000 1 Jan 2010 Opening Balance B/D 40000
Depreciation as expense put in P/L
account 14000
54000 54000
Balance B/D 54000
Taxation charge RM15300 is deducted from net profit at the bottom of income statement. It is also recorded as accrued taxation RM15300 under current liability in balance sheet.
Proposed dividend to be deducted from net profit at the bottom of income statement
=2% x RM500000 (share capital from trial balance) = RM10000
Then, the proposed dividend RM10000 is recorded under current liability in balance sheet.
Income statement of Continental Limited for year ending 31 Dec 2010 for internal use
Sales 365000
Less Return Inwards 10000
Net Sales 355000
Opening Stock 50000
+ Purchase 204000
– Return outwards 15000
+ Carriage inwards 5000 244000
Less Closing Stock 65000 179000
Gross Profit 176000
Add Income: 5000
Dividend received 181000
Less Expenses:
Stationery 700
Office electricity& water 7300
Office salaries 26000
Sales commission 19500
Bad Debts 5000
Increase in provision for bad debts 2000
Loss on disposal of vehicle 2500
Depreciation on vehicles 12500
Depreciation on premises 14000
Vehicle expenses 12000
Interest charge 3000 104500
Net profit 76500
Less Taxation charge 15300
Less proposed dividend 10000
Profit for the year 51200
Add Retained earnings brought forwards 100000
Retained earnings carried forward 151200
Balance Sheet of Continental Limited as at 31 Dec 2010 for internal use
Fixed assets/ Non-current assets RM RM
Office premises at cost 350000
(-) Provision for depreciation on premises (54000)
Vehicles at cost 29600
(-) Provision for depreciation on vehicles 250000
Long-term investments (60000)
Current assets 190000
Closing stock 65000
Trade debtors 70000
-Provision for bad debts (7000)
Bank 42000
Prepaid office salary 2000_
Issues share capital
Share capital 500000
Add Reserve
Retained earnings carried forward 151200
Shareholders’ equity 651200
Add Long-term liabilities/ Non-current liabilities
Loan 55000
Add Current Liabilities
Creditors 25000
Accrued sales commission 1500
Accrued Taxation 15300
Proposed dividend 10000 51800
Conclusion for task 2
In my conclusion, income statement and balance sheet of an organization is very important to know that organization are now in profit or loss.
4.0 Introduction for task 3
In task 3, the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in accepted format for external reporting or publication will be prepared. Which is means that after the income statement and balance sheet of Continental Limited prepared, it will be shown to the public or outsiders for external reporting.
4.1 Classify expenses into contribution cost and Administrative expenses.
Distribution costs Administrative expenses
Stationery – 700
Office electricity & water – 7300
Office salaries – 26000
Sales commission 19500 –
Bad debts 5000 –
Increase in provision for bad debts 2000 –
Loss on disposal of vehicle 2500 –
Depreciation on vehicles 12500 –
Depreciation on premises 14000
Vehicles expenses 12000 –
Total 53500 48000
Income statement of Continental Limited for year ending 31 Dec 2010 for external reporting
Turnover 355000
Cost of sales 179000
Gross profit 176000
Distribution costs 53500
Administrative expenses 48000
Operating profit 74500
Dividend received 5000
Interest charges 3000
Profit on ordinary activities before taxation 76500
Taxation charge 15300
Profit on ordinary activities after taxation of the year 61200
Proposed dividend 10000
Retain profit for the year 51200
Retained profit brought forward 100000
Retained profit carried forward 151200
Balance sheet of Continental Limited for the year ending 31 Dec 2010 for external reporting
Fixed Assets RM RM RM
Tangible assets:
Premises 296000
Vehicles 190000
Long term investment 100000
Current Assets
Stock 65000
Debtors 63000
Prepaid office salary 2000
Cash at bank 42000
Less Creditors: Amount Falling Due
Within One Year
Creditor 25000
Accrued sales commission 1500
Accrued taxation 15300
Proposed dividend 10000
Net current assets 120200
Total Assets Less current Liabilities 706200
Less Creditors: Amount Falling Due After More
Than One Year
Loan (55000)
Capital and Reserves
Called up share capital 500000
Profit and loss account 151200
3.2 Conclusion for task 3
In my conclusion, income statement and balance sheet for external reporting or publication must be prepared neatly and precisely. Because it might affect the image and the business of the organization,
Introduction for task 4
Accounting ratio is one of the ways to define the relationship among result and the others, such as balance sheet, and profit loss account. Accounting ratio can use to measure the efficiency, effectiveness and profitability of the organization according to its financial reports.
5.1 Calculation of accounting ratio
The table below is the calculation of the accounting ratio between Continental Limited and the industry averages for year ending 31 Dec 2010.
Ratio with formula Ratio calculation Industry
for year 2010 averages
Percentage of gross profit on sales 17600 x 100 30%
= Gross profit x 100 355000
Net sales = 49.58%
Percentage on operating profit on sales 74500 x 100 18%
= Operating profit x 100 355000
Net sales = 20.99%
Return on capital employed 9%
= Net profit before interest x 100 (76500 + 3000) x 100
and taxation 158000-51800
Total assets-current liability =11.26%
Current ratio 2:1
= Current assets 172000
Current liabilities 51800
= 3.32 : 1
Stock turnover period 90 days
= 365 days 365 days/3.11 times
Stock turnover in
Times = 117.36 days
Stock turnover = Cost of sales
Average stock value
Average stock = (Opening stock value + Closing stock value) / 2
= (50000 + 65000) /2
= 57500
Stock turnover = 179000
=3.11 Times
Debtor collection period 0.177 x 365 days 45days
= Debtor ratio x 365 days = 64.6 days
Debtor ratio = Debtor
Net credit sales
= 63000
= 0.177 : 1
Creditor payments period 0.132 x 365 days 60 days
= Creditor ratio x 365 days = 48.18 days
Creditor ratio = Creditor
Net credit purchase
= 25000
=0.132 : 1
Comparison between Continental Limited and Industry Averages to Assess Profitability
According to the table above, it has state that the gross profit margin of Continental Limited is 49.58% while the gross profit margin of industry average is 30%. In this situation, when the gross profit margin are higher, it means that the organization are controlling their purchasing cost effective and efficient Besides, it also show that the organization perform good in allocating their raw materials and labor force to helps in reduce production cost and increase their gross profit.
Next, the operating profit margin of Continental Limited ratio calculation for year 2010 is 20.99% while the industry average is 18%. When the operating profit margin is high, its means that the organization profits are still high even finish paying those variables cost. Operating profit margin can show whether an organization are effectively in their expenses and variable cost.
Lastly, the return on capital employed (ROCE) of Continental Limited in 2010 is 11.26% while it is 9% in industry average. ROCE are usually used to measure all the resources that available in the organization and demonstrate the efficiency and revenue of an organization. So, when the percentage of ROCE becomes higher, the performances of the organization are better. The percentages of Continental Limited is higher than the industry average,
Comparison between Continental Limited and Industry Averages to Assess Liquidity
According to the table above, it has show that the current ratio of Continental Limited is 3.32:1 and the current ratio of industry average is 2:1. Current ratio is use to measure the financial status and the ability of the organization in using their current assets to finance its current liabilities. In this situation, it shows that the finance of the organization is stable and did not face any short-term financial problems.
Secondly, is the stock turnover period of Continental Limited which is 117.36 days and the industry average is about 90 days. Stock turnover period is the time that the goods keep before purchased by customers. In this situation, Continental Limited had longer stock turnover period compare to the industry average, it might cause short-term financial problem because of keeping stock for long time and slowly taken out for resale.
Next is the debtor collection period. The debtor collection period of Continental Limited is 64.6 days and 45 days for industry average. Based on this period we can know that Continental Limited is taking longer time than industry average to collect debts from the debtors. It might cause organization having shortage of pay back those liabilities and face short-term finance problem.
In last, the creditor payment period of Continental Limited is 48.18 days and the industry average is 60days. Which shows that Continental Limited has the shorter time to pay the creditors compare to industry average and it might cause lack of many to pay back the creditors
Conclusion for task 4
In my conclusion, accounting ratio can enable an organization or accounting users understand the liquidity and profitability of an organization. So, it make easier when an organization plan for future of budgeting.
6.0 Conclusion and Recommendation
In my conclusion, this assignment enables me to understand the usefulness and the function of the account which can helps to know well an organization easily. In task 1, the most common accounting users are defined and let me understand of the 5 basic characteristics of financial statement. So, it helps a lot in preparing an organization financial statement.
While in task 2, it let me know that income statement and balance sheet of an organization is very important to know that organization are now in profit or loss. It also let me let the proper way in preparing balance sheet and income statement for an organization.
In task 3, income statement and balance sheet for external reporting or publication must be prepared neatly and precisely. Because it might affect the image and the business of the organization,
In task 4, accounting ratio can enable an organization or accounting users understand the liquidity and profitability of an organization. So, it make easier when an organization plan for future of budgeting.

Importance Of Audit Evidence Accounting Essay

According to Companies Act 1965 Section 174, auditor should perform the following duties, Statutory Duties. Auditor should examine and form an opinion whether the financial statements compliance the financial reporting standards of Malaysia and the Companies Act 1965.
Duty to carry out audit. Auditor should examine and form an opinion whether the financial statements give a true and fair view of the financial position of the Company as of the financial year end and of its financial performance and cash flows of the year end.
Duty to report to appropriate management. Auditor should report the accounting and other records and the registers required by the Companies Act to be kept by the company have been properly kept in accordance with the provisions of the Act.
Duty to be independent. Auditor is under a duty to exercise the appropriate standard of care to shareholders and outsiders.
Duty to use reasonable care and skill. Auditor should obtain reasonable assurance that the financial statements are free from material misstatements.
(2) “The auditor must plan the audit so as to enable him/her to detect all misstatements”. Discuss.
The purpose of planning stage is plan the audit so that it will be performed in an effective manner. During the planning stage, auditor should design and perform the audit planning to detect the potential threat that may be occurred and also limited the audit risk to a lower level. Auditor will get the knowledge of the client’s business, auditor able to identify the potential threat that may be occurred. The planning stage will be emphasis on the material misstatement based on the professional judgement but not absolute detect all the misstatement such as immaterial misstatement will not be concern.

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(3) Explain the steps to be taken by the auditor if there are reasons to believe that there are (i) errors and (ii) frauds.
According to SAS 110, the auditors shall indicates that fraud or error that exist by obtaining an understanding of the nature of the event and the circumstances, and sufficient other information to evaluate the possible effect on the financial statements. If the auditors believe that the indicated fraud or error could have a material effect on the financial statements, they should perform appropriate modified or additional procedures.
Where there is a significant error or fraud, the auditor should consider the necessity for a disclosure of the error or fraud in financial statements, and report to the relevance third party (management level). If adequate disclosure is not made, the necessity for a suitable disclosure in his report so called qualified audit report.
(4) What is an audit engagement letter? What steps should be taken by the auditor after receiving the audit engagement letter?
According to standard, audit engagement letter refers to a written contract between accounting firm and the client. Its purpose is to confirm the relationship between the client engaging the auditor and the accounting firm accepting the audit engagement and to define matters such as the objectives of the engagement, the scope of the audit, the responsibilities and duties of each party etc. The audit engagement letter has statutory binding force.
After receiving audit engagement letter, there will be an interview or opening conference between engagement parties and audit firm. During the meeting, auditee is asked about the system to be reviewed available resources and other relevance resource. The auditor may be required to meet the person in charge those relevance resources.
After getting the required information, auditor will perform a general overview on it and review the internal control of the auditee in order to determine the audit risk that may be occurred.
(5) What are the purposes of the audit working papers?
1. To provide a basis for planning the audit. The auditor may use reference information from the previous year in order to plan this year’s audit, such as the evaluation of internal control, the time budget, etc.
2. To provide a record of the evidence accumulated and the results of the tests. This is the primary means of documenting that an adequate audit was performed.
3. To provide data for deciding the proper type of audit report. Data are used in determining the scope of the audit and the fairness with which the financial statements are stated.
4. To provide a basis for review by supervisors and partners. These individuals use the audit documentation to evaluate whether sufficient appropriate evidence was accumulated to justify the audit report.
Audit documentation is used for several purposes, both during the audit and after the audit is completed. One of the uses is the review by more experienced personnel. A second is for planning the subsequent year audit. A third is to demonstrate that the auditor has accumulated sufficient appropriate evidence if there is a need to defend the audit at a later date. For these uses, it is important that the audit documentation provide sufficient information so that the person reviewing an audit schedule knows the name of the client, contents of the audit schedule, period covered, who prepared the audit schedule, when it was prepared, and how it ties into the rest of the audit files with an index code.
(6) Describe the different types of information that are kept in the current file.
Current audit file include following resources:
Audit plan, report and audit programme’s copies
Clearance the problems and confusion during the time of audit work such as journal entries and minutes of meetings.
Copies of annual records such as trade account, trial balance and profit and loss account and balance sheet
Bank reconciliation statement
Minutes of meetings
Current financial statements
Working papers supporting account
Paper of calculation of tax bonus.
List of lost proofs
Paper regarding stock evaluation
(7) State the nature and the importance of audit evidence.
According to ISA, there is nine type of audit evidence which include physical examination, confirmation, documentation, analytical procedures, inquiries, scanning, recalculation, reperformance and observation. The nature of audit evidences includes invoices, contracts, and worksheets, general and subsidiary ledger and so on.
Audit evidence is important as it provides the auditor with the information regarding the potential threat or weakness that may be occurred in the client’s financial statements. Audit evidence is useful as it provides the auditor with some degree of competent evidential support for the expression of an audit opinion. It facilitates the completion of audit programme scheduled and undertaken.
(8) According to ISA 500, what type of evidence is the auditor required to collect?
According to ISA 500, auditor required to collect sufficient and appropriate audit evidence in order to draw reasonable conclusions on which to base the audit opinion. Sufficiency and appropriateness are interrelated and apply to audit evidence obtained from both tests of controls and substantive tests.
Sufficiency is a measure of the quantity of evidence and it refers to sample size and items to select. Higher quality evidence results in a lower quantity of audit evidence.
Appropriateness is a measure of the relevance and reliability of evidence, or the degree to which evidence can be considered believable or worthy of trust. Appropriateness relates to the audit procedures selected, including the timing of when those procedures are performed.

Ethics and Corporate Responsibility: Accounting Fraud

The key issued described in the suit against Xerox Corporation is that Xerox had overstated its revenues during the past four years by almost $2 billion. The fraudulent scheme had misled investors about Xerox’s earnings to polish its reputation on Wall Street and to boost the company’s stock price.
These accounting fraud cases show us that ethics is a real issue, a very current issue and it is one that needs to be addressed. Unethical behaviour is common and reasons exist for such behaviour. Recent accounting scandals involving high-profile companies such as Xerox Corp have called into question accounting practices and undermined public confidence in the profession. These ethical scandals in the ‘real world’ suggested a market economy being out of control and raised demands for more stringent and effective government regulation. Such deception by management hampers the ability of the users of financial statements from gaining accurate business information for decision-making and leaves their interests unprotected.

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a)What are the ethical issues confronted in these cases?
The term ethics refer to a system or code of conduct based on moral duties and obligation that indicate how we should behave; it deals with the ability to distinguish right from wrong and the commitment to do what is right. Unethical behaviour in the corporate world is political and business scandals, which arise with the disclosure of misdeeds by trusted executives of large public corporations. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates.
For Xerox Corp. it has been defrauding investors since 1997 till 2000. In a scheme directed and approved by its senior management, Xerox falsely portrayed itself as a business meeting its competitive challenges and increasing its earnings every quarter. Xerox knowingly or recklessly increased revenues and earnings by accelerating the recognition of revenues through mostly non-GAAP accounting actions, overstated its earnings by using so called “cookie jar” reserves and interest income from tax refunds, disguised loans as asset sales and manipulated its accounting in violation of generally accepted accounting principles (GAAP). All of them should have been disclosed to investors in a timely manner because, singly and collectively, they constituted a significant departure from Xerox’s past accounting practices and misled investors about the quality of the earnings being reported.
Besides that, senior Xerox management reaped over $5 billion in performance-based compensation and over $30 million in profits from the sale of stock.
The practices summarized above constitute an unlawful scheme by Xerox to defraud investors through undisclosed accounting practices and other material transactions, some of which the company knew or should have known violated GAAP. Xerox failed to tell investors that these actions were the reason Xerox met or exceeded consensus earnings estimates quarter after quarter.
b) The possible reasons or factors that may cause the unethical actions in the cases.
The ethical issues faced by Xerox corp can be explained from a personal, organizational and systematic level and it possible reasons why they commit unethical actions.
Personal Level
Possible reasons: Individual moral failures and greed
Personal level calls for the character evaluation of the main individuals that participated in the various fraud as for Xerox Corp Former Chairman and CEO, Paul Allaire, Former Chief
Financial Officer, Barry Romeril and KPMG partner, Michael Conway, in a statement
reported that they are the main person whom in charged by the SEC way back year’s of
1999. The values and ethical behaviours of these individuals have continuously been called
into question. Many of the charges directed towards these individuals are a clear indication
of acquiring personal interest.
It is not that the senior executives did not receive any ethics training earlier on but it is their own individual moral failures and greed that led to the distortion of financial statements. They did not consider the social implications of their unscrupulous decision on their company and also all parties with interests in the company. What concern these executives are their own individualized interests especially in wealth maximization.
Organizational Level
Possible reasons: The need to follow orders from bosses and pressure from top
management on their accountants to make the numbers add up.
An unethical practices by the Top management to ensure that the accountant of the
Corporation to make up the financial statement reporting to reflect the corporation financial
position was on a good position no matter what it cost as long as they can manipulate the
treatment of accounting practices.
This might be the reasons for the accountant in that organizational tied up( unable to
perform as an independent parties) with the mislead accounting practices in order to follow
the command of the superior management.
As in Nicor Energy’s overstated unbilled revenue by approximately $4.5 million for 2001
was a collusion between Johnson (senior-most financial officer) and Stoffer (NE’s
President & CEO) in inflating the unbilled revenue number.
Stoffer also directed a reversal of a portion of the incurred expense of 2001 into 2002
to meet year-end earnings targets.
Besides that, Johnson who was responsible for setting the level of the bad debt reserve
was under pressured by Stoffer to purposely understate the bad debts reserve.
Systematic Level
Possible Reasons: Cosy relationship the firms have with their corporate clients
and Enormous pressure from Wall Street investors to keep up
short term earnings.
As been spell out, many external factors have contributed to the confront of this unethical
issues. Such possible factors from the external forces are Corporations often hire accountants and other personnel from their auditor and accountants and much of the pressure brought to bear on accountants; stems from the cosy relationships the firms have with corporate clients.
As for Xerox’s auditors, KPMG kept silent when it found out about the accounting discrepancies in Xerox so that they can maintain their relationship and businesses with Xerox.
There was no watchdog ( legal and structure) at Xerox. KPMG’s bark sounded no warning to investors; its bite was toothless.
Beside the possible causes that might led them to commit in these unethical actions possibly
might be due to the investment climate of 1990s added insults to injuries. Cited back, year
of 1990s, Companies that failed to meet Wall Street’s earnings estimates by even a penny
often were punished by significant declines in stock price. In addition, compensation of
Xerox senior management team depended significantly on their ability to meet increasing
revenue and earning target.
c).Who were the stakeholders (individual or groups) that are affected by the unethical
actions? How are they affected by the fraud or unethical actions?
Stakeholders are those groups “who can affect or [are] affected by the achievement of the firm’s objectives.” Stakeholders in a company may include shareholders, directors, management, suppliers, government, employees and also the community. The unethical actions in Xerox Corp have affected the stakeholders in a way or so.
Shareholders are invariably the first victims of top management fraud. When news of fraud by a firm becomes public knowledge, it immediately reduces the stock market value of the companies involved. Bondholders and other creditors of the firm can also end up bearing the negative effects of management fraud.
After news of the financial fraud at Xerox Corp. is released, Xerox’s stock has been declining sharply and is now trading at about $7. Shareholders can no longer assume that management is acting within the law or with their best interests in mind. Shareholders now require greater openness on the part of their senior managers.
Fraud also depresses the overall moral climate in a society. It can lead to a general lack of faith in the integrity of senior managers, erosion in the confidence in the free market system, including its political institutions, processes, and leaders, and a general growth of cynicism in a society. The failure of accounting firms to detect managerial fraud has also led to less faith in audited financial statements. Worse still, many believe that the accounting firms have compromised their own integrity because of the lure of lucrative consulting contracts from firms they were auditing. In Xerox’s case, their auditor, KPMG complied with management at Xerox to allow the accounting irregularities to continue.
Employees of companies whose top managers engage in fraud often are hit the hardest, even when they are unaware of their executives’ illegal activities. Fraud can cause employees to lose their jobs, their retirement savings (which often are tied up in company stock) and their reputations. Frequently, the very fact that employees have worked for a fraudulent company taints their resumes to the point that some find it difficult to find jobs elsewhere. The negative impact of Xerox’s fraud was that Xerox has laid off thousand of workers in the past two years and may make further retrenchments in the future.
d) Discussion on the governance and control issues arising from the companies’
The highly visible accounting scandal in Xerox Corp showed us one significant matter; the corporate governance and internal controls is failed in the corporations. The worst incidences of fraud are usually committed by insiders, among whom those executives figure prominently who are assigned to manage and control their organizations. Corporations are now looking at how they can make their respective boards of directors more effective. Xerox Corp, has made a good progress on corporate governance and control issues arising from the company’s experience.
They have adopted strict new guidelines on what constitutes director independence. Applying this definition, 75% of their directors are independent.
Proactively integrated Sarbanes-Oxley Act and proposed NYSE rules into their governance processes.
Revised and strengthened the charters for their Board of Directors’ committees.
Hold regular executive sessions of outside directors without Xerox management present.
Launched a massive effort to strengthen internal controls, train their people and promulgate a clear and strong Code of Conduct.
Established an Ethics Help line for their employees and have taken other measures all aimed at making Xerox a role model in ethical behaviour.
Bear in mind that, no laws or policies will ever be sufficient to end all corporate misbehaviour. We are confident, however, that truly independent and inquisitive boards of directors will provide the best safeguard against corporate wrongdoings. such Audit Committees must be autonomous and vigorous, Financial Information is inherently judgmental ,give Sarbanes-Oxley a chance to work, excessive executive compensation can be tamed by the Compensation Committee and directors must be selected and appraised by Independent Nominating Committee.
Fraud had damages the reputations of the individuals and firms involved. Revelations of top management fraud have caused the public to question the ability of boards of directors to monitor senior executives and protect shareholders’ wealth. As for Xerox Corp, in order too minimize the harm caused by the unethical actions by the executives, firstly Law and regulations are, and will remain, the most influential external drivers of corporate ethics, but legislation is no substitute for the presence of leaders who support and model ethical behaviour. The single most important ethical leadership behaviour is keeping promise, followed by encouraging open communication, keeping employees informed and supporting employees who uphold ethical standards. Corporate leaders need to communicate ethical values throughout the organization, but they must do more than talk the talk in order to establish and sustain an ethical culture. As for specific programs and practices, a corporate code of conduct is viewed as being most important to prevent or minimize accounting frauds. Such a code must reflect and reinforce the values and principles of an organization. Besides that, ethics training for all members of the organization, corporate social responsibility programs, ombudsman services and help lines can be done to combat unethical behaviour. In summary, employees need to have a code to set the ethics foundation, training to help people truly understand it, and programs that permit them to inquire about and report ethical violations. A comprehensive Whistleblowers Act to provide wide-ranging protection for whistleblowers in all sectors too can help encourage whistle blowing.

Examining The Effectiveness Of Accounting Systems Accounting Essay

The assignment begins with an attempt to find out the effective of accounting systems within a business and the analysis of management control systems of a business.
I used a mixture of primary and secondary research methods to complete this assignment. I have provided references at the end where necessary and used a variety of books and notes. Along with that I consulted a few websites, details are on the references.
Introduction of accounting
Accounting is all about providing financial and economic information. Accounting information is economic information, it relates to the financial or economic activities of the business.
Accounting information shows the financial position of a business. This is done by the set of accounts, based on a system known as double-entry bookkeeping.
One of the first complete documentation about how to keep books of accounting was written by the professor of mathematics in Rome Luca Pacioli in 1494. This documentation described the double-entry system of accounting. It was adopted and still used today around the world.
Users of Accounting: there are two type of users.
Types of accounting
There are two types of accounting
1: Financial accounting
Financial accounting tells us about the financial position of Business it is used to prepare financial statement. This gives all the finance related information to its users and on the basis of that information a user will be able to do comparison and analyse the position of the company and it takes part in important decision making process.
2: Management accounting
On the other hand management accounts deals with the budgeting, business expenses and cost analysis it is used to make planning and control the business expenses.
Accounting systems
Computerised accounting system
Manual accounting system
These days computerised accounting system is widely used in all type of businesses. The result of this system is more convenient and accurate then manual accounting system.
The question arises how this system operates, this system operates by computer software which has to install in the computer. Accounting packages software’s which is used in these days it is used to get payroll packages sales ledger purchase ledger and fixed assets. There are lots of accounting software’s are available one of the famous software name is off the shelf software it generates the document by getting commands by coding this software is very easy to use because of this software we don’t need any professional accountant who set up the account it is very convenient to use one of the example of such software is sage which is very common in these days and easy to operate and it generates the accounts information by its self by coding and another kind of software is called as BESPOKE software it’s a customised software most of the bigger size organisations are using this software. It gives them customised entries in the books of accounts.
Computer operates on the bases of dose commands to performs its tasks for the accounting software coding is used to make the software more easy to use
e.g. 05 for purchases
15 for interest
25 for profit and loss accounts
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Manual accounting system
Manual accounting systems are the traditional form of maintaining a business’s accounts and records this includes different steps like ledgers cash book petty cash book income statement and balance sheet which includes all the day to day transactions and sell purchase accounts this accounting system needs skills and knowledge to full fill its requirements.
1.1 Effectiveness of accounting system within a business:
Information generated from the accounting system can be effective in decision making process sale and purchase of assets and in investments. Quality and benefits of accounting system is evaluated from the performance evaluation, internal control and proper records of transactions.
Effectiveness of accounting information is depend on time management which have a great effect on accounting systems effectiveness, there for the accounting records should be maintain on time and with accuracy of accounting information it have a great impact on the effectiveness of accounting system.
Generally accounting information system provide the information about financial position on daily and weekly basis the effectiveness of accounting system not only depend upon the propose of such system it also depend on the contingency factors ( factors like culture understanding of organisation and outer atmosphere) accounting information is said to be effective when the information is complete and according to the system users effectiveness of accounting system is subject to many researches from a long time.
Accounting information is usually divided into two categories (1) the information that facilitate decision making (2) Information that influence decision making.
1.2: Accounting records
All of the documents and books includes in the preparation of accounting records includes journal, ledger, trial balance, cash books, invoices or any document which help in to make accounts.
In accounting records a cycle is used which is called as accounting cycle it determines the steps of financial statement.
Purpose and use of accounting records:
All accounting records are very useful and had a great value for its respective business without a proper accounting records it is very difficult to run a business successfully.
The purpose of maintaining accounting records to evaluate how much capital and assets a business have and also maintain the records of creditors and debtors or buyers and sellers by the respect of that records a user can have a clear eye on the business and watch the losses and profits in the business whether the business doing well or not and on the basis of that records business can take decisions whether business have to invest or take out all the investments or run the business as it is these record help to make more accurate and satisfied decision making which help to make business more profit and also used for calculating tax liability and give the information to the investors who are willing to buy the shares of that company.
Accounting concepts
Accounting concepts is very important, it is used to support the application of the “true and fair view”, and accounting has adopted certain concepts which help to ensure that accounting information is presented accurately and consistently.
(1) Going concern: it is assumed that the business entity for which accounts are being prepared is solvent and variable, and the business will continue its operations for the foreseeable future. This has important implications for the valuation of assets and liabilities.
(2) Accruals concept: revenue and expenses are taken account of when they occur and not when the cash is received or paid out.
(3) Prudence concept: revenue and profits are included in the balance sheet only when they are realized and liabilities are included when there is a reasonable ‘possibility’ of incurring them it is also called conservation concept. Profits are not recognised until a sale has been completed. In addition, a cautious view is taken for future problems and costs of the business (they are “provided for” in the accounts” as soon as there is a reasonable chance that such costs will be incurred in the future.

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(4) Consistency concept: once an entity has chosen an accounting method, it should continue to use the same method, except for a solid reason to change. Any change in the accounting method must be disclosed. Transactions and valuation methods are treated the same way from year to year, or period to period. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change.
(5) Entity concept: accounting records reflect the financial activities of a specific business or organization, and not of its owners or employees.
(6) Matching concept: transactions affecting both revenues and expenses should be recognized in the same accounting period.
(7) Materiality concept: relatively minor events may be ignored, but the major ones should be fully disclosed.
(8) Realization concept: any change in the market value of an asset or liability is not recognized as a profit or loss until the asset is sold or the liability is paid off (discharged).
(9) Money measurement concept: accounting process records only those activities that can be expressed in monetary terms (with some exceptions, as in cost-accounting).
(10) Separate entity concept: Business is the separate entity from its owner.
(11)Relevance concept: This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?)
1.3: Factors Affecting Accounting System
There are lots of factors which affect the accounting system the major factor are which affect the organisation is the (1) nature of business and (2)size of organisation and 3the structure of the organization if the organization is a multinational company then the accounting system of that organisation is on a very high level and very complex and they have separate department for all the accounting related work if a small company going to increase its size then they should have to change the accounting method and adopt the new method because of large amount of transactions are also taken place in the business on which the old method can no longer apply, and the other factor which affect the accounting system the change in IAS if in IAS some new rules are coming in then the business have to adopt that rule and adopt in the business and make there strategy according to it.
2.1: Business risk:
Business risk cannot be eliminated but must be managed by companies. There are several ways to minimize the business risk by proper planning.
Determining Business Risk: Developing the Business Risk Model
It is important for an organization to identify the business risks that exist in the environment in which it operates. To identify those risks, organizations must look at their external environments. External business risks are economic, political, social, environmental, technological, and other external conditions.
An organization cannot fully understand its business risks unless it also understands its business objectives, strategies, and processes.
Interrelationships between business objectives, strategies, processes, and business risk
Types of risk:
Operational risks:
Operational risks are associated with your business’ operational and administrative procedures. These include:
supply chain
accounting controls
IT systems
board composition
Business should examine these operations, prioritise the risks and make necessary provisions.
Financial Risk:
Financial risk is the risk made by equity holders by using of firms debt. If the company raises capital by borrowing money, I t must pay back with the interest charges. This increases the degree of uncertainty about the company and it must have enough income to pay back that amount in the future
Compliance risk:
Compliance risk is the possibility that the business will not comply with laws and regulations in the jurisdictions where it operates or that the organization will break any legally contract. Noncompliance can be dangerous, or it can result from being unaware or local legal requirements.
Response to risk:
A business can take any given risk.
Accept risk: if the risk of loss is minimum then only accept the risk and carry on business according to it.
Reduce risk: reducing the risk by better planning and strategies
Avoid risk: do not enter into that kind of business in which there is some bigger risk
Transfer risk: companies can also transfer the risk by taking insurance policy.
2.2: Describe and evaluate the control system
The environment in which business operates and the system it adopts is a process, affected by an entity’s board of directors, management and other personnel, designed to provide assurance regarding to the success of objectives in the following areas:
effectiveness and efficiency of operations,
reliability of financial reporting, and
Compliance with applicable laws and regulations.
IAS315 gives us an understanding of the entity and its environment and assessing the risk of business and control system of business.
ISA identify the five elements of control system,
The control environment
Risk assessment
Information and communication
Control activities
Control environment:
Control environment is that in which control system operates. Control environment is defined by the business management. Control environment forming a base for control activities, risk assessment, monitoring, awareness and action of those changed with governance and management. The control environment is the most important component because it sets the tone for the organization. Factors of the control environment include employees’ integrity, the organization’s commitment to competence, management’s philosophy and operating style, and the attention and direction of the board of directors and its audit committee.
Risk assessment:
Risk assessment analyse the identification, analysis, and management of uncertainty in business facing the organization. Risk assessment is relevant to the financial reporting and organization operational objectives. The management have to carry out a risk assessment from auditor which provides information with confidence that company system will not have any error in them.
Information system:
Information system is the system that processes the information within an organization it includes processing the information and the procedure to initiate record and report on financial statement both manual and computerised.
Control activities:
Control activities include the policies and procedures maintained by the management of an organization to find risk. E.g. Control activity is a policy requiring the approval by the board of directors for all purchases exceeded from an estimating amount. Control activities are the important element of internal control, this provide satisfaction to prevent wrong decision from occurring.
Monitoring refers to the assessment of the quality of internal control. Monitoring activities provide information about potential and actual breakdowns in a control system that could make it difficult for an organization to achieve its goals.
2.3: Fraud
Fraud is an intentional mistake by the management, employs or third parties for illegal financial advantages. Or if we talk about an error it’s an unintentional mistake.
Fraud is difficult to be identifying because it is done by complete planning and care so the internal audit is conduct to detect the fraud.
The distinguishing factor between fraud and error is that action which results in a misstatement of the financial statements it is intentional or unintentional. The term ‘fraud’ is a broad legal concept, but the auditor is concerned with fraud that causes a material mistake in the financial statements. ISA 240 (Redrafted) defines fraud as: ‘An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. And
“SAS 99 defines fraud as an intentional act that results in a material misstatement in financial statements”
Types of fraud:
There are many types of fraud which relates to a business.
Ghost employ
Miscasting of payrolls,
Stealing unclaimed wages,
Collusion external parties
Teeming and leading
Altering cheques and inflating expense claim
Stealing assets
Issuing false creditor notes
Failing to record all sales
Prevention of Fraud:
Fraud is preventing by implementing the rules and laws in the business some of the points are written below which is very useful for the business to prevent the business from fraud.
A good internal control system
Continuous supervision of all employees
Surprise audit visits
Through personal procedure
Detection of fraud in the business:
Maintaining key control procedure reduce the risk of fraud occurring and increases the risk of detection control over cash transaction are more important this is the main area in which mostly frauds are happen.
Cash receipts:
Keep eye on all transactions which are placing in the business. Divide the duties between different functions, in other words more than a person. There are following point which is very useful to detect the fraud.
Receipts by post:
Safeguard to prevent interception of mail between receipts and opening.
Appoint person to supervise mails
Protection of cash and cheques
Control over cash sales and collection:
Restriction of receipts received
Clearance of cash officer and register
Investigation of cash storage and surpluses
Paying into bank
Daily banking
Make up and comparison of paying in slips and receipts
Banking receipts record
Condition and events:
Particular financial reporting pressure in an entity;
Inadequate working capital due to declining profit or too rapid expansion
Increases sales on credit this area should be check to find out if anything is going wrong is that department.
Unusual transaction:
If unusual transaction is take place especially at year end that give’s any significant effect on earnings.
Complex transaction or accounting treatment.
Task 3
3.1: Auditors
Duties, rights and liability;
What is an audit?
An audit is an examination of a company’s financial statements prepared by the directors of the company. Its purpose is to give the company shareholders an independent, professional and informed opinion on the financial statements:
• It has been prepared according to the Companies Acts, any other relevant legislation and relevant accounting standards.
• It gives a true and fair view of the condition of the company on financial statement.
Who is an auditor?
An auditor is an independent professional person who is qualified to audit a company’s financial statements.
What does an audit involve?
In carrying out an audit, an auditor will usually:
• Identify the data of the financial statements that have some errors.
• check the transactions record, account balances and disclosures.
• Give suggestions on company’s accounting policies are reasonable.
• Test that the company’s internal controls are effective.
• write management letter if any problems discovered during the audit and advise on how to deal with that.
• write and issue the auditor’s report to the members of the company.
What are the duties of auditors?
Duty to provide an audit report:
The main duty of auditors is to report to the shareholders on whether in their opinion the company’s financial statements give a true and fair view. They may give:
• A qualified opinion – this says that the financial statements give a true and fair view of the company’s state of affairs except for certain stated circumstances.
• A disclaimer of opinion – this shows that the auditor is unable to give an opinion whether the financial statements gives a true and fair view or not.
• An adverse opinion – it says that the financial statements do not give a true and fair view.
What are the rights of auditors?
Auditors have the right to:
• Access the books and accounts of the company and its subsidiaries;
• Access information and explanations from the company’s directors and employees.
• be notified of company general meetings and address the meetings.
• explain in general meeting the circumstances of any condition to remove them as auditor.
Liabilities of auditor:
Give a true and fair view on financial statement and deliver the right information to the general public and shareholders to prevent them from loss
3.2: Internal and external audit:
The External Auditor:
the external auditor tests the transactions record that takes part in the financial statements.
The internal Auditor:
The internal auditor, on the other hand, deals with its major operations, risk management and internal controls.
 The Main Differences
There are many key differences between internal and external audit.
The external auditor is an external contractor how does not belongs to the organization, company hire the he auditor for auditing firms. The external auditor seeks to provide an opinion on whether the accounts show a true and fair view.
Whereas internal audit forms an opinion on the adequacy and effectiveness of systems of risk management and internal control, many of which are outside the main accounting systems.
 The 3 Key Models of Organization Activities Involves Internal and External Audit
3 Key Models of Organization Activities involves Internal Vs External Auditor
Difference and Similarities of Internal Auditor Vs. External Auditor

Here is a list of “Internal Audit Versus External Audit “in detail:
Internal Auditor Vs External Auditor
3.3: Planning of auditing
In auditing of any organisation, auditor has to consider certain things before audit.
First is scope
In any audit should be to determine its scope and the auditor’s general approach.
Audit strategy:
Auditor has to make some strategy for the auditing and place it with auditing documents which defines the major areas on which auditor has to take extra care and the difficulties associate with audit and the auditing clients points of concerns.
Documents accounting system:
Auditor has to collect all those documents associated with audit e.g. financial statement, transactions record, receipts, and other related documents. Auditor need these documents to analyse it and find all the aspects of transactions to find out whether the financial statement have any error or not or is there any possibility of fraud is there or not and whether it gives a true and fair view or not.
System and internal controls:
At this stage the objective is to determine the flow of documents and the facts related to the documents and the operational system in the organisation. At this level auditor has to find the facts related to documents and the documents flow in the departments including sales, purchases, cash and stock and accounts personal. This is the good way to find out the rough estimate of system, after that which will be converted into formal record.
Audit Risk:
Just like risks in business some risks are also relates with the auditing.
Audit risk is defined as:
“Audit risk is the risk that that auditor may give an inappropriate opinion on the financial statement”
Components of audit risk:
Audit risk has three components:
Inherent risk:
Inherent risk is the risk that auditor may be misstated because of lack of knowledge and insufficient information available for it. Auditor has to use their professional practice and available knowledge about the item to asses’ inherent risk if no such information is available then the inherent risk is high.
Control risk:
Control risk is the risk that organisation control system fails to detect the material misstatement. And the financial statement do not prepare according to the IAS.
Detection risk:
Detection risk is the risk that auditor will fail to detect the material misstatement of accounting system. Detection risk relates to the knowledge, practice and the experience of the auditor.
Materiality is relates to the financial statement, it is an expression of the relative importance of a particular matter on the mean of financial statement as a whole or as an individual. A matter is material if its omission or misstatement could influence the economic decision of the users which basis on that financial statement. Materiality depends on the size operations of organization.
ISA 320 tells the auditor to consider materiality and its relation with risk at the time of conducting an audit.
3.4: Audit testing and uses
In developing overall audit plan, auditors uses five types of audit tests to find out whether financial statement are truly stated or not.
Procedures to Obtain an Understanding
Auditors perform this by a system called walkthrough to obtain understanding it applies on the transactions and entire process is operated like this.
Tests of Controls
procedure used to obtaining an understanding about internal control, it contains followings evidences
Make inquires of client personal
Examine documents, records and reports
Observe control activities
Reform client procedure
Test of Control is used to determine whether the control system is effective or not and usually involves a testing of transaction.
Substantive Tests of Transactions
Procedures designed to test for dollar misstatements of financial statement balances.
Analytical Procedures
To indicate possible misstatements
To reduce tests of details of balances
Tests of Details of Balances
Focus on ending G/L balances
It is used to find out whether the balance of the financial statement is accurate.
3.5 Records Auditing process
Audit test:
In the large company with sophisticated internal control and low inherent risk therefore auditor perform extensive test and it relies on the client internal control to reduce substitutive test because of the emphasis on test of control and analytical procedure, this audit can be done comparable in inexpensive. This audit likely represents the mix of evidences used in integrated audit of public company financial statements and internal control over financial reporting.
4.1: Purpose of Audit Report
Audit report is that report in which external auditor express their opinion about the true and fair view of the financial statement of the organisation.
The audit report is published for the shareholders, management or directors and also for general public. There are two key differences between the report to shareholders and to report for the management.
The shareholders report is to show whether the financial statement shows a true and fair view
And the private report for the management and directors which contain comments and recommendations on the financial statement
Contents of audit report:
Auditor report on financial statement contains clear opinion based on the assessment of record. Audit report draw on a complete pattern which gives the clear view to its users. The main contents of audit report as follow.
Untitled contents.JPG
4.2: Different qualifications in report:
There are two types of reports one is unqualified or unmodified report and the second is qualified or modified report.
1: An unqualified audit report gives assurance to its users and gives true and fair of the financial statement and there is no material mistakes are in it. An unqualified report extract by laws and rule under companies act 1985. Which contain followings?
Proper accounting records
All information and explanations
Details of director’s benefits
Particulars of loans and other transactions
2: Qualified report:
On the qualified report auditor give two types of opinions.
Matters that affect the auditor’s opinion
Matter that do not affect the auditor’s opinion
Matters that affect the auditor’s opinion
Auditor may not be give appropriate opinion because of some circumstances like insufficient material of financial statement. And others factors are as follow.
There is any limitation of scope in auditors work. It may be material or pervasive
Disagreement with management it may be material or pervasive
These two factors farther divide into two branches.
A limitation of scope may lead to disclaimer of opinion. A disclaimer opinion should be expressed when the limitation of scope is so material or pervasive when auditor do not obtain any evidence related to that to express his opinion on the financial statement.
Disagreement may leads to adverse opinion. It should be expressed when effect of disagreement is material and pervasive when some misleading or incomplete information in the financial statement.
Matters that do not affect the auditor’s opinion
In some circumstances auditor may give unqualified opinion because of the uncompleted information in the financial statement in this case auditor write a paragraph is called as emphasis of matter describing a fundamental uncertainty and then give an opinion on that.
4.3: Management letter:
The Board of Directors, ABC & CO
Alpha Co Limited, certified accountants
15 Essex Road 29 High Street,
London, EC1N 2HB

Managerial Accounting And Shareholders Accounting Essay

1. What obligations did the financial managers have to their shareholders to do whatever is possible to avoid major financial losses associated with these products?
According to Ask (2002), all major business institutions nowadays are being forced to continuously upgrade their financial status, technologies, innovate their products and services that they offer as well as extend their customer reach to avoid major financial losses associated with problems about their products particularly in developing countries, and utilize resources through financial strategies. Apparently, the main effect of the situation to the company is that it is forcing all types of costing systems, from small to large scale causes, to amend their current financial strategies and processes, and to restructure their production and processes. Financial manager of Dalkon Shield must set some necessary changes to effectively and efficiently respond to the continuously evolving needs of the company.

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Financial managers make sure that shareholders get their investments fully. It is also their role to make sure that shareholders are receiving their entitled maximum returns for their investment. To avoid major financial losses associated with these products, financial managers are facing with the task of engaging in different activities that brings value to the shareholders and the company. Financial managers can implement different strategic plans to inform providers and top management for the development of strategies and implementations of plans. Narrowing the company’s strategic partners through engagement in narrowly defined financial areas is also helpful for the financial mangers (Chua, 2006).
As implementers of strategies, the role of financial managers also consists of shareholder value maximization. Financial managers can increase and create value from the financing, budgeting, and networking activities such as buying assets which create more cash than they cost or they can sell stocks and bonds and other instruments financially which all generate more finances than their costs. When the financial manager will try to a healthy balance between the shareholder and the company needs, they also need to follow ethical standards by ensuring that all statements and their financial transaction are true and correct (Chua, 2006).
In this situation, the company has experienced on maximizing their business by smoothly ensuring that all services are working and provide the expertise for the generation of financial System. This is an important in the field of financial management for the company and financial managers should developed basic information and concepts regarding the employed effective strategies to avoid major financial losses associated with these products. The objective of these actions is to identify and present the most important features of product and planning to sell products in a well established amount. These include product analysis, competitor analysis and marketing operations that focus on channel distribution, costing objectives, market analysis, customer satisfaction and a great tool in order to cope with the challenges of product placement. Consumer and environmental analysis are important area made by a continuous effort to make connections and form relationships with finances, customers, and finance and distribution channels designed financing strategies. Business network of the company can help the financial managers to contribute to effective supply management that support and investigate the influence of the situation on financial management processes (Ask, 2002).
In a perspective of this company, strategies used by the financial manager must suggest that the financial losses be prepared to respond appropriately to random costing agreement with the shareholders. If long-run performance is not greatly impacted by shareholders and if it is caused by random impacts, then firms must monitor these shocks and transform them into opportunities. Importantly, these impacts cannot be readily predicted. Thus the firms must have an agile mechanism scan in conjunction with a flexible marketing organization. Before any of these implications are strongly adopted much more marketing strategy refinement is necessary. The financial strategies employed by financial managers are effective tools that may be used by the marketing manager to aid in more effective planning and strategy development of product and business. This is an important factor that provides framework for more specific mix strategies and tactics in the products or services, distribution, promotion, and pricing areas (Van Horne & Wachowicz, 2005).
Another factor to consider is the strategy which is effective tools that may be used by the firm to aid in more effective strategy and planning development. This is an important factor that provides framework for more specific financial mix tactics and strategies. Throughout the years many international business organizations has invested in propagating their marketing strategies as well as the flow of investments. The financial manger must have been investing on effective services and production to aid in its goal. Strategic financing process also affects the decision making as it affects the capital opportunities and company capabilities in developing a total return of investments to their shareholders (Van Horne & Wachowicz, 2005).
2. Was the dumping in this case ethical? Those involved in the dumping might have argued that the people receiving the pajamas would not have otherwise had access to such clothing and were notified of the health and safety hazards. Does this affect your feelings about the case? What do you think about the exportation of the Dalkon Shield? Can it be justified because the rate of dying during childbirth in Third World countries is extremely high, and, as such, any effective birth control device is better than none?
International laws presented that a firm is dumping if its foreign price is either below its marginal cost or below domestic price. In this case, ethical consideration must be consider by the company since the firm often claim that a low-cost is engaged in a long term strategies in harming domestic consumers and destroying the domestic industry (Viner, 1991).
It was also a most unethical way and a clear indication of how money always eclipses the significant issue in this case. Whatever causes that these children would have access to fire-retardant pajamas, they would also not have had opportunity to have kidney cancer had they not been exposed unduly to the chemical toxic for their health. The same is true Dalkon Shield of exportation; many serious and worst physiological problems associated with utilizing this product do not have advantages or benefits. A complete fundamental tenets breakdown in social responsibility will aid such blatantly unethical global practices (Ramadan, 2007).
In exportation of the Dalkon Shield, planning strategies in the context social responsibility and safety hazard is important. Exportation management fails because of factors including the current environment, feasible methods and the security system. The planning and resources must be value information. In some areas, failure of information dissemination happens automatically especially when there is a problem with the product itself or the safety and the integration of this information to a certain period. Another dimension of challenge in this kind of market environment is the complex and evolving regulations which this institution conducts business. In contrast, there are handfuls of effective strategies for the exportation of the Dalkon Shield that may help the firm implement strategy from a global perspective. Foremost, the planning must concern with the Dalkon Shield organizational governance, with decisions making capacities, and the processes for making sure that the export decisions made are implemented properly. There are several factors for export trends including the market mass liberalization, technological impact, and the ever changing distribution and communication and method worldwide. The safeties in the markets are increasingly becoming more important to public, multinational companies, and this phenomenon directed to philosophy and organizational shift of the export, research and marketing companies. The advantage of this approach to research buying include better coordination and control of the research in many economies, research findings comparability, and better view and understanding of transnational basis in terms of the functions (Viner, 1991).
The rate of dying during childbirth in Third World countries is extremely high, and the draw back of focusing too much on material success is the tendency to neglect ethical issues and may tolerate corruption. These firms must be committed in strengthening public confidence and understanding in clinical research and biotechnological expertise in all aspects of the clinical research. Regulations on effective birth control device are better than none because all information and activities of related to this issue must be regulated through information submitted to authority. Moreover, industry related to biotech, pharmaceutical and medical device companies, as well as their regulations and legislations which involves academic organizations, peer associations, patient groups, and the public must assures the safety and ethical considerations in clinical trials through collaboration and working with the public and their stakeholders globally to explore different possibilities and paradigms for contraceptive research and development. The product of the company must promote efficient and better clinical trial process especially in developing new drugs biotechnology while demonstrating the strategic values of clinical outsourcing and reiterating the importance of public contributions as partners in the new treatments and new birth control contribution (Atkinso, 2004).
In this case, different laws enforces by the government and other related agencies includes reports which identifies the approved drug products approved on the basis of effectiveness and safety of their products under the Drug, Federal Food, and Cosmetic Act. In terms of controlling contraceptives and other related products, the company requires any manufacturer to dispense by prescription only with exemptions in emergency cases and is closely regulated by other sub laws. These drugs must have a warning on the label when given out to the client. The manufacturer must comply with approved good manufacturing practices set by the agency. It must also have a “uses” section that presents the uses of the drug under appropriate testing so the client or patient is aware of the definite usage or application. The firm must enforces its regulations through various methods such as investigations, punishments, licenses to improve these processes; and must closely monitor the company’s processes in response to testing of the product for safety and efficiency and to adequately label the product to avoid violations of the law (Fishbein, 2005).
Q4. Compare and contrast job order and process costing. Support your answer with examples relevant academic references.
The job order costing system is used for the estimation of production cost for various jobs included in specific orders of the customer. Within the organizations treating every single job as a single unit output, or when production of different products within a specific time, this costing system type is most important. In this regard, it appears that firms in developing countries need to pay some attention to new techniques, so they can help their society and their country to be able to compete in the international market by conducting studies on these new techniques, and show its advantages and disadvantages. The company should also employ job order and process costing strategy for product development on fact finding, analysis, generation of technical and management plan goals (Atkinso, 2004).
Labor hours, materials, and machine hours will be different from a specific product to another and one order of the customer to the next, and may be different further in the demand that is placed inherently on overhead manufacturing. One example of a specific job or customer order is customized production that might need greater resources for support than general activity of production. If a firm specializes for the manufacturings were to produce a specific product patented and designed by another firm, it may need some re-engineering process; materials utilized not used in overall production, or another factor for change such as a different description or product logo. In this case, management would need to be sure that the specific customer order equates all relative costs; otherwise information for product cost will not be correct. In the circumstances where the company is producing different product type within a specific period of time, job order costing system employment would also be applicable as management would require in recognizing the overall actual costs for each product. Service companies may not get benefit as much from job order and process costing as compared to other industries because their costing can be hard to assign as they may not have a visible relationship of cause and effect (Kaplan, 2007).
Nowadays, traditional cost systems became unpopular among companies, since these cost systems were designed long time ago for different circumstances. For example, companies used to produce a small number of products and indirect cost (overhead) was quite small, compared to the total cost at that time overhead did not cause any problems to the managers. On the other hand, in the 1980s many companies started produce different variety of products and indirect cost started to play an important role. Therefore, the traditional cost systems are no longer desirable by managers. Managers started to think to change these systems after realizing that these systems are not reliable for managerial purposes anymore. Recently, many companies are facing a real competition in the world market, due the fact that some companies produce high quality products at low costs. For that reason managers attempts to adopt a cost system which can give them accurate information and the exact cost for each product, so managers can take right decisions at the right time (Laughlin, 1995).

The Private Pension Industry In Ghana Accounting Essay

Ghana, a role model in terms of economic and political stability has recently been upgraded to a middle-income country following years of implementing sound economic policy and stable political environment and with this upgrade comes its own challenges.
Ghana’s economy is strong and promises generous future growth and the need for a much more comprehensive social security system is understood to be of great importance. In 2004, the government started a journey to reform the social security/ pension system and these reforms created an opportunity for the participation of the private sector in pension delivery. This proposed business plans seeks to establish a trustee company, which will provide pension related products to the formal and informal sectors of the Ghanaian economy who have traditionally been excluded from the national pension system.

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The private pension industry is a new and virtually untapped industry offering an opportunity to serve a large proportion of Ghana’s workforce, as this section of the working class is key in the success of developing a comprehensive pension system. This industry is estimated to be valued at GHS and will insist of 2nd tier and voluntary 3rd Tier pension system. The national pension scheme has seen an average annual increase in contribution of 10%.
The target market for the proposed business is a young adult between the ages of 16 and 45 years. The target market will consist of young professionals, self-employed individuals and those who traditionally do not have access to the national pension scheme namely hairdressers, mechanics, etc. With the growing appreciation of securing one’s future, the target group demand quick and efficient services, products that meet their existing and future needs and an industry that responds quickly to their needs.
Currently, there is no existing service provider in the private pension industry however the life insurance industry is expected to lead the way and be the dominant players in the provision of these services. The proposed business plan seeks to be consumer focus providing excellent customer services, constant customer feedback and innovative and simple product design and use. The competitive advantage of the proposed business include accessibility through the use of a comprehensive distribution network, excellent customer service and product design based on need.
The proposed business is a private pension provider rendering trusteeship, custodian and fund management services. The company is a limited liability company with a proposed stated capital of GHS3, 000,000.00. Each of the business owners will raise GHS90, 000.00 each and the difference will be funded using bank credit lines, private investors and asset financing.
Undertaking the proposed business plan provides the following findings:
Ghana’s economy remains positive and stable providing generous growth now and in the future
New pension reforms and creation of new industry provides both threats and opportunity
Vast untapped informal market available to the new industry
Current shortfalls in the national pension will be catered for by private providers
Proposed business provides opportunity for development of local capacity in pension design and management
With robust regulatory system and effective strategic planning this propose business has a fair chance of succeeding and growing into a very successful business and being part of the development of the private pension industry in Ghana.
1.0 The Introduction
Research Background and Motives
Over the years concern had been raised about the current state of the Ghanaian social security system which has been characterized by inadequate benefits which is extremely difficult to live on if not mere impossible. As pointed out by the International Social security Association (2003), Social security systems in Africa are characteristically too exclusive and inadequate of which Ghana is not exception. Like other social security systems in Africa, Ghana’s social security system covers only the formal workforce, which constitutes a small fraction, usually no more than 20% of the total labor force.
This inherent characteristic of the social security system makes social security exclusive, as those outside the formal sectors do not have access to social security or a national pension. Furthermore due to the relatively small number of contributors to the national social security scheme, benefits under the social security scheme is inadequate. Ghana like many other African countries has institutions, laws and government structures that were adopted from their colonial masters without much modifications and thought. The institutional structures were most often designed to meet the goals and objectives of the colonial masters who at that time were the elite. One may wonder why social security systems that are meant to provide protection for all in society tends to cover only a small fraction of society.
The international social security association points out that, most social security systems like many other things were adopted from the colonial masters. These social security systems were really intended to cover a small body of employees who were at the time working in the colonial administration and mine workers. This meant that all others outside this scope fell outside the social security system. This inherently remained, as most countries even after independence were unable to devise social protection programs that were tailored to the needs and circumstances of the people.
Based on the background above, I am motivated through this business proposal to highlight the importance of the development of a much-needed private pensions scheme to augment the existing national social security system and also to provide those who are outside the national social security system an avenue to secure their futures and have enough to live on when they retire.
1.2 The Motives
The motive for undertaking this business proposal is to bridge the gap created by the current social security structure, which excludes those within the informal sector of the Ghanaian economy. Secondly, private pension plans will also provide extra revenue to those who have retired as the current benefits under the national plan is woefully inadequate.
At the end of this start up business proposal I hope to be able to:
Understand current economic and business environment in Ghana
Understand the structure of Ghana’s social security system
To analyze current regulatory framework in place and its likely impact on the operations of the start up
To analyze the development of the chosen market and industry
To determine the essential inputs for the start-up and future development plans
To analyze any academic theory on successful business start-ups
1.3 The Objective
The main objective of this business plan dissertation is to:
Identify if any, opportunities and challenges for a private pensions company in Ghana
With the opportunities I have identified and challenges write a start up business plan for a private pension company in Ghana
Provide information on procedure to follow when setting up a company in Ghana
In this write up the main focus will be on the company operating in one specific area of pensions which is the tier three of the pensions act. Long-term strategies may see the company evolve to extend other pensions/ savings products.
1.4 Research Methodology
The aim of this write up is to put together a business plan for a start up private pension company in Ghana based on sound research on the subject matter of private pensions in the chosen market and academic theory on the principles entrepreneurship and business management.
The research therefore will mainly be based on secondary data from credible governmental resources and non-governmental agencies. I will also make use of academic articles, journals and industry reports.
1.5 Structure
The write up will be split into five (5) chapters with details of each chapter as follows:
Chapter 1: The first chapter will have the introduction, which contains the background, the motives and objective, brief research methodology, structure of the write up and a comparative analysis of social security systems in the developed and underdeveloped worlds.
Chapter 2: Economic Overview of chosen market, history and importance of social security in chosen market, overview of the social security system now and then, social security structure, and challenges facing the national social security system
Chapter 3: Description of the business idea, marketing plan/strategy, pricing, mission and vision, Human Resources.
Chapter 4: Chapter four will be the financial plan. In this section will include financial assumptions and financial projections for the next five years.
Chapter 5: The conclusion, this section will contain exit strategies and also discuss any immediate or future impact of the proposed business on the Ghanaian economy. This section will also summarize key success factors of the proposed business.
Chapter 2
Under this chapter I will look at the economic overview, economic performance and outlook of the chosen market for the proposed business, I will then go further to look at the development of social security/ pensions in Ghana, and then look at the overview of the social security system of the chosen market, Ghana.
As earlier stated under my aims for this project, I seek to provide some insight as to what it takes to start a business in Ghana, therefore under this section I will also provide information or insight in relation to what procedures needed to follow when setting up a business in Ghana.
2.0. Economic Overview of Ghana
The Republic of Ghana is a West African country with land area of 92,100 square miles, which is boarded by Cote D’Ivoire, Burkina Faso, Togo and Gulf of Guinea.
Ghana has always been known as a country of great natural resources, hence the nickname, “The Gold Coast”. Ghana is rich in gold, timber, diamond and cocoa and has an economy that is heavily dependent on agriculture. Ghana remains one of the leading producers of Gold and Cocoa in the world. Agriculture in Ghana accounts for 37% of GDP and employs an estimated 55% of the national workforce. It must however be noted that agriculture is still largely small scale, non- commercial and not mechanized.
Ghana’s economy is one of the most stable and fast growing economies in Africa and has achieved impressive growth as a result of the discovery of oil and natural gases. With such impressive growth and relative stability in the macro-economic indicators, Ghana attained a lower middle-income economy status according to the World Bank, however youth unemployment and poverty continues to be a major issue. 25% of Ghana’s youth are unemployed and 37% of the population currently lives on less than $1.25 a day.
Despite a 14.4 % growth in Ghana’s economy in 2001 according to the World Bank, Ghana’s external debt over the last 3 years has increased by 125% from $8 billion in 2008 to $18 billion in 2011.
In terms of investment, Ghana has Africa’s 3rd largest stock exchange with South Africa and Nigeria ahead of Ghana respectively.
2.1 Economic Performance and Outlook
Ghana’s economic performance over the last decade has been impressive. GDP average annual growth rate was 6% between 2005 and 2007, increased to 7.3% in 2008 but however declined to 3.9% in 2009 on the back of the global financial and economic crisis.
Inflation increased by 41.7% from 12.7% in 2007 to 18.1% in 2008 however due to effective economic policies and austerity measures inflation for the last 3 years has steadily falling to its current rate of 9% as at 2011 for the last 9 months since. Increase in non-oil imports and income outflows widened Ghana’s current account deficit by some 38% at the end of 2011.
Despite these challenges, Ghana’s economy has outgrown the global economy for the past 4 years. Whilst the global economy grew at an annual average rate of 3%, Ghana’s annual average growth rate has been 6.5%.
The adoption of austerity measures to cut public spending and the stability of macroeconomic indicators have helped Ghana survive probably the worst part of the global economic meltdown and it remains one of the most promising economies in Africa. Based on the indicators above on the economic health of the country, Ghana’s medium-term growth remains positive, largely driven by investments in the mining industries, public infrastructure and commercial agriculture according to the World Bank.
2.2 Development of Pensions Scheme in Ghana
Pension systems in Ghana date as far back as the colonial era. The first kind of pension system was introduced in Ghana in 1946. The pension system was a non-contributory pensions scheme and its aim was to cater to the retirement benefits of those who worked within the colonial administration and also included mine workers. Kpessa (2010) noted that Ghana’s social security system at the time was designed, as a means of encouraging loyalty and efficiency within the colonial service as a result was quite exclusive. Like most programs introduced during this era, old age income protection policies were limited to urban dwellers especially Europeans and a few Africans working in the colonial bureaucracy.
It was not until 1950, the Pension Ordinance No.42 (Cap 30) and Superannuation schemes was established in an effort to have a social security system in place that covered a greater portion of Ghanaian workers. It was established as a pension scheme for public servants in the Gold Coast. These schemes covered certified teachers, University lecturers and all government workers however a vast majority of Ghanaians were unable to benefit from this scheme (Adjei, 2000).
In 1965, the Social Security Act (No. 279) was passed to cover all private and public sector workers who were not covered under the Pensions Ordinance No.42. The scheme initially started as a provident fund, providing benefit for old age, invalidity and survivor benefit. This Act was repealed and the social security and national insurance act (SSNIT) was established under NRCD 127. The trust was established to administer the new social security scheme.
The scheme was later converted to a social security pensions scheme and in 1991 turned into a defined benefit scheme following the enactment of the Social Security Act 1991 bringing some level of adequacy into workers pensions.
For a worker to qualify for old age benefit, the worker must have worked for a minimum of 240 months and be at least 60 years of age. Workers in the extractive industries such as mining however have a mandatory retirement age of 58 years under which they qualify for old age benefits.
For workers who have been injured at work, they may qualify for payment under the invalidity benefit section of the social security system. Benefit is payable over a period of 12 months.
If a retiree dies before reaching the retirement age his or her benefit is calculated as the present value of all contributions and paid to the surviving spouse or dependents.
The Social Security and National Insurance Trust (SSNIT) has four major functions:
Collection of contributions
Record keeping – keeping up to date records of all contributing members
Processing and payment of benefits
Pensions fund management
2.3 Overview of Social Security/ Pensions in Ghana
A universal social security/ pensions scheme in Ghana has not been in existence for so long having been established in the 1990’s; earlier forms of social security were exclusive. The Social Security Pensions Scheme (SSPS) was established in 1991 under the Social Security Law PNDCL 247 and under the trusteeship of the social security and national insurance trust (SSNIT).
Twenty-five years prior to this, Ghana run a provident scheme established under the social security act of 1965 (Act 279).
Under the 1991 scheme, the Social Security and National Insurance Trust collected the contributions of the Ghanaian worker. The Act provided for compulsory coverage for workers in establishments that employ at least five workers. An establishment with less than five employees had the option to join the scheme, but there was no compulsion (Kumado & Gockel, 2003). However, the following categories of workers, although they employed more than five persons, were exempt by law from joining the scheme;
members of the Armed Forces, the Police Service and the Prison Service;
Foreigners in the diplomatic missions; and
Senior members of the universities and research institutions.
Funding of defined contribution schemes is based on contributions made by the employer and the employee on behalf on the employee. These contributions are invested and when the employee reaches retirement age, becomes permanently incapacitated or dies prior to retirement; the total contributions together with returns on the investment are paid as a lump sum to the employee or his/her dependents (Kpessa, 2010)
Under the scheme the Ghanaian workers total contribution constitutes a total of 17.5% of his salary to the scheme towards his pension and the contribution structure is designed as follows:
Employees – 5% of employee’s salary
Employer – 12.5% of employee’s salary
Total Contribution – 17.5% of employee’s pay
Under Ghana’s pension scheme there are three basic benefits, which include Old Age Pension, Invalidity Pension and Death Survivor Payment. Pension benefits in Ghana are indexed annually using the average rate of increase in the contributions inflow from the previous year. This is done to prevent any distortions in the financial equilibrium of the scheme.
In order to qualify for benefits under the pensions scheme one must meet the eligibility requirement and amounts payable under each section are as follows according to the Social Security and National insurance Trust:
Old Age Benefit
To qualify for old age full pension payment, a worker should have contributed to the scheme for a minimum of 240 months, which is equivalent to 20 years, and should have attained either the voluntary retirement age of 55 or compulsory retiring age of 60. The law applies differently to persons who have worked in hazardous conditions such as the mines. Such categories of workers under the law qualifies for a full pension at the age of 55 provided the worker has been engaged in such work for 240 months or more.
The minimum pension payable is 50% of the average of the 3 best years salary for a minimum contribution period of 240 months. For any additional month served after the 240 months, a worker earns a pension right of 0.125%, i.e. 1.5% for every 12 months in addition to the 50% start off. Thus, a worker can theoretically earn up to 80% pension when he shall have worked and contributed to the scheme for 40 years.
As earlier mentioned, workers who opt for early retirement at age 55 or retire anytime before they are 60 years are entitled to a reduced pension. Benefit due is calculated on an increasing scale from the age of 55 years, meaning that those who retire closer to the statutory retirement age receive a higher percentage of their full pension than those who don’t. Percentages of full benefit due are as follows:
Age 55, 60% of full pension; 56, 67.5% of full pension; 57, 75.0% of full pension; 58, 82.5% of full pension; 59, 90.0% of full pension.
Pensions are paid monthly, however retirees have an option of receiving payment in advance equivalent to 25% of 12 years pension as a lump sum and subsequently be on a reduced pension.
If a worker before attaining the age of 60 is unable to have contributed the minimum 240 months to the scheme he is entitled to receive all his actual contributions plus interest at half the prevailing interest rate on government treasury bills.
With regard to survivors benefit, if a contributor dies while still a member, his dependents qualify for a lump sum of the earned pension. When a member contributes to the Fund for 240 months before dying, a lump sum equal to the value of his pension for 12 years shall be paid to his survivors. If a member dies without having contributed to the fund for 240 months, the payment to his survivors will be his proportional pension for a period of twelve years. Where a member who has retired dies before he is 72, his survivors will be paid in lump sum the unexpired pension up to age 72.
To qualify for invalidity pension, a member shall have contributed to the Fund for 12 months within the last 36 months before becoming invalid. In addition, the member should have been certified permanently invalid and incapable of gainful employment by a medical board including
2.4 Parallel Pensions Scheme
One may be tempted to think that the pensions scheme being administered by the Social security and national insurance trust covers all workers in Ghana, however as indicated above some sections of the working public are exempt from the national pension scheme. This is because such workers are covered under a different pensions scheme with pre-dates the national pensions scheme.
The scheme, which is affectionately, called CAP 30 (name derived from Chapter 30 of the Pension Ordinance of 1946) provides pensions for Civil Servants and the Armed Forces and some teachers. Today there are still members of these working sectors who are covered under CAP 30. Such members contribute 5% of their pre-tax salary, which is nevertheless not saved but recycled into the Consolidated Fund. However, it is still a non-contributory plan for the armed forces, the police, and the prisons services. These employees take home all of their earnings; no deductions for pension coverage. This aside there are other features of the CAP 30 that offers superior value as compared to the Social Security and National Insurance Trust including:
10 years for full retirement vs. 20 at SSNIT;
70% of final salary compared to 50% of average of three highest years’ salary at SSNIT
CAP 30 pension payments are indexed annually to current salary scales
Ghana’s social security system lacks cohesion as evidenced in the disparities that exists under the SSNIT and CAP 30 an there is an urgent need for the harmonization of the social security system in Ghana by replacing the current systems with a comprehensive all inclusive system
2.4 Pensions Reform in Ghana and overview of National Pensions Act 2008
Over the years concerns have been raised about the disparities and seemingly greater benefit under the CAP 30 as compared to the Social Security and National Insurance Trust (SSNIT) pensions scheme. Public sector workers further agitated over the inadequacies of the current social security benefits and its inability to sustain a respectable life during retirement. Furthermore, the current social security system has failed to include those in the informal sector who constitute about 80 percent of the working force.
The road to social security reform in Ghana began in July 2004, to provide a universal pension scheme for all Ghanaian workers following the agitations described above which lead to the drafting and passing of the National Pensions Act 2008. The Act is divided into four parts; the first part talks about the establishment of a National Pensions Regulatory Authority that will be responsible for the regulation of pensions schemes in Ghana as well as a three-tier contributory pensions scheme.
The second part deals with the basic national social security scheme; Part Three provides for occupational pension schemes, provident fund and personal pension schemes and management of the schemes and finally the general provisions of the Act is contained in part four.
According to the Social Security and National Insurance Trust, under the new Pensions Act 2008, there is a three tier contributory scheme, which replaces the current Social Security Pensions Scheme and CAP 30. Under the new scheme a total contributory amount of 18.5% of a workers monthly salary will be paid towards their pension and this is distributed between the first two tiers. The first two tiers are mandatory and the third tier is voluntary. Below are the features of each tier:
First Tier
The first tier is the basic national social security scheme, which incorporates an improved system of SSNIT benefits. This tier is mandatory for all employees in both the private and public sectors. The mandatory basic national social security scheme is to be managed by SSNIT.
Contribution to the first tier will be 13.5% of an employee’s monthly salary. Whilst this tier is mandatory for all employees in the public and private sectors, self-employed members of the working class have an option to join the scheme and are under no obligation to do so. Of the 13.5%, 2.5% will be deducted and transferred to NHIF.
Benefit due under this tier will be calculated using the average of the highest 3 annual salaries Ã- 50% +1.5% of every additional 12 months contributed. A contributor under the first tier cannot be less than the age of 15 and not older than the age of 45 years when joining the scheme.
Second Tier
The second tier is occupational (or work-based) pension scheme and it is a mandatory scheme for all employees, however this tier will be privately managed. This tier was designed primarily to give contributors higher lump sum benefits compared to what is presently available under the SSNIT or Cap 30 pension schemes. A total of 5% of an employee’s monthly salary shall be allocated to the second tier provided the employee falls within the age limit stipulated under the first tier.
If the worker however, falls outside the stated age limit, all of the 18.5% contribution shall be transferred to the second tier. The voluntarily provident fund and personal pension schemes are to be managed by approved trustees, licensed by a National Pensions Regulatory Authority and pension fund managers and custodians, licensed by the Security and Exchange Commission and registered with the Authority.
Under this tier a defined benefit is payable to a retiree, spouse or dependent after termination of service, retirement or death.
Third Tier
The third tier is a voluntary provident fund and personal pension schemes, which provides tax benefit incentives for workers who opt for this scheme in addition to the first two. As earlier mentioned, the previous pensions scheme was relatively exclusive and did not provide cover for 80% of Ghana’s working population. The introduction of the third tier is an effort to address the issues concerning the old pensions system, which by design excluded those in the informal sector and did not provide avenue for the citizenry to arrange their personal pensions in addition to the state pension. The aim of the third tier therefore I believe, was to provide those in the informal sector to have their future secured by contributing to a private scheme and also provide those already covered under the national scheme to augment their existing benefits should it still be seen as inadequate.
This tier is fully funded and is also privately managed by licensed trustees that will want to provide private pension schemes.
2.5 Governance
A National Pensions Regulatory Authority (“the Authority”) has been established to regulate both public and private pension schemes in the country. The Authority will approve, regulate and monitor Trustees, Pension Fund Managers, Custodians and other institutions relating to pension matters.
To ensure that contributors” interests are adequately protected, the National Pension Act has in-built safeguards. These include stringent approval and registration criteria by the Pensions Regulatory Authority; separation of functions of Trustees, Fund managers and Custodians; on going monitoring among several others.
Trustees licensed by the Authority would be required to take out adequate insurance to indemnify scheme members against any losses of scheme assets caused by malfeasance or misconduct of the trustees or their service providers.
Among other impacts, the new scheme will ensure improved living standards of the elderly; financial autonomy and independence of retirees; increased national savings and availability of long-term funds for economic development; and the Promotion of growth and development of the capital, mortgage and insurance markets.
3.1 Background
In 2004, the government of Ghana started the process of reforming Ghana’s pensions system and in 2008 passed the National Pensions Act 2008, which saw the birth of a new pensions system in Ghana, the establishment of a new pensions regulatory body and most importantly the participation of the private sector in the delivery of social security in Ghana.
The opportunity presented through the National Pensions Act 2008, is what has motivated me to write this business proposal for the establishment of a pensions trust in Ghana to participate in the third tier of Ghana’s pensions System.
The new pension scheme will comprise two mandatory schemes and a voluntary scheme as follows:
First tier which is a mandatory basic national social security scheme will be managed by the Social Security and National Insurance Trust (SSNIT)
Second tier occupational (or work-based) pension scheme will also be mandatory for all employees but privately managed by approved and licensed trustees
Third tier voluntary provident fund and personal pension schemes, supported by tax benefit incentives to provide additional funds for workers in both the formal and informal sectors who want to make voluntary contributions to augment their state pensions benefit.
The Second tier and the voluntary third tier will be privately managed by approved trustees licensed by the Pensions Regulatory Authority with the assistance of pension fund managers and custodians registered by the Authority. It is within the third tier that a business opportunity exists for the establishment of a trustee company that will provide pension products to individuals and organizations in Ghana.
3.2 Benefits of the New Pensions Scheme
The new pension scheme offers a number of benefits above the old system. According to the Social Security and National Insurance Trust (SSNIT), workers within the formal and informal sectors stand to benefit from the following under the new pensions scheme:
Provision of Superannuation:
Reduction of contribution period from 240 months to 180 months
Full benefit increased from 50% of the average of the highest three years earnings to 80%
Provision of healthcare premium for all contributors to social security pensions scheme
Occupational Scheme: provides lump sum benefits to contributors after attaining the age of 50 years.
Survivors benefit calculations increased from 12 to 15 years
Using lump sum benefits under the second tier to secure mortgages meaning workers can obtain their own houses by using their lump sum benefit as collateral
Better controls over personal pensions under the second and third tier