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Managing Finance and Budgets

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Title: Managing Finance & Budgets Author: Liverpool Hope Last modified by: hope Created Date: 8/23/2000 9:13:11 AM Document presentation format: On-screen Show – PowerPoint PPT presentation

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Title: Managing Finance and Budgets


1
Managing Finance and Budgets
  • Lecture 12
  • Ethical Legal Issues

2
Session 12 Ethical Legal Issues
  • KEY CONCEPTS
  • Accounting Rules
  • Auditor responsibilities
  • Creative Accounting
  • Whistle blowing
  • Corporate Social Reporting
  • Accounting for the environment

3
Ethical Legal Issues
  • A Accounting Regulatory Frameworks
  • B Creative Accounting
  • C Ethical Accounting

4
Section A
  • Accounting
  • Legal and Regulatory Frameworks

5
Accounting Rules
  • There are three distinct Sources of Accounting
    Rules for PLCs
  • Company Law
  • Accounting Standards
  • Stock Exchange Rules

6
Sources of accounting regulations for a UK
limited company listed on the Stock Exchange
7
Company Law
  • Company Law as embodied in the Companies Acts
    1985 1989 requires that Directors are
    responsible and accountable for their actions in
    respect of their management of the companys
    assets
  • To maintain appropriate accounting records
  • To prepare an annual profit loss account, a
    balance sheet that shows a true and fair view of
    accounts as well as a Directors Report and to
    make these available to all shareholders and the
    public at large.
  • The term true fair is not clearly defined
    in the legislation

8
Accounting Standards
  • Accounting Standards or Financial Reporting
    Standards are the rules established by the
    Accounting profession that should be followed in
    the preparation of the annual accounts of
    companies.
  • These rules are not legally binding, however they
    do define more clearly what is meant by true and
    fair
  • Different standards are concerned with
  • how an item should be treated
  • presenting information
  • disclosing information
  • valuing assets and measuring profits.

9
Stock Exchange Rules
  • These rules extend the accounting rules for those
    companies listed on the Stock Exchange.
  • These rules require
  • Summarised interim (I.e. half-yearly) accounts in
    addition to the annual accounts.
  • A geographical analysis of turnover
  • Details of shareholdings in other companies where
    the investment is greater than 20

10
The Audit Process
  • Shareholders are required to elect a qualified
    independent person to act as Auditor.
  • The role of this person (or firm) is to report on
    whether or not the companys financial statements
    are true and fair, and whether they comply with
    the regulatory frameworks.
  • In order to do this, auditors must not only
    scrutinise the statements, but the evidence on
    which the statements are based.
  • Their report is sent to the Registrar of
    Companies.

11
Auditors
  • Shareholders elect the directors to act on their
    behalf.
  • The directors account for the financial
    performance and financial position of the
    company.
  • The shareholders elect an auditor to check that
    the statements made by directors are accurate
  • The auditors report to the shareholders.

12
The relationship between the shareholders, the
directors and the auditors
13
Section B
  • Creative Accounting

14
Deviant Accounting Practice
  • The Collapse of ENRON, the investigations into
    Xerox in 2002 and other high-profile events has
    raised questions about the effectiveness of the
    Regulatory Frameworks.
  • The accounting methods used by Anderson
    Associates for example seem to have successfully
    persuaded the corporate community that certain
    companies were profitable, when in reality those
    companies were in deficit.
  • Many of the accounting practices used, while not
    exactly illegal, do not abide by the spirit of
    the regulations. They are sometimes
    euphemistically termed Creative Accounting

15
Creative Accounting
  • Every company in the country is fiddling its
    profits. Every set of published accounts is based
    on books which have been gently cooked or
    completely roasted.
  • Ian Griffiths Creative Accounting (1985)
  • Much of the apparent growth in profits which had
    occurred in the 1980s was the result of
    accounting sleight of hand rather than genuine
    economic growth.
  • Terry Smith Accounting for Growth (1992)

16
Creative Accounting
  • The accounting process consists of dealing with
    many matters of judgement and of resolving
    conflicts between competing approaches to the
    presentation of results of financial events and
    transactions. This flexibility provides
    opportunities for manipulation, deceit and
    misrepresentation
  • Michael Jameson
  • A Practical Guide to Creative Accounting (1988)

17
Creative Accounting - Methods
  • Selection of accounting policies
  • Using judgement to give an optimistic or
    pessimistic view as required
  • Using artificial transactions to manipulate
    balance sheet entries or to move profits between
    periods
  • Timing transactions to move profits to required
    time frame

18
Creative Accounting - Example
Old stock re-valued upwards by 5m
  • REAL Balance Sheet
  • Fixed Assets 25m
  • Current Assets
  • Stock 10m
  • Debtors 5m
  • Current Liabilities -10m
  • LT Liabilities -15m
  • 15m
  • Capital 20m
  • LOSS -5m
  • 15m
  • CREATIVE Balance Sheet
  • Fixed Assets 25m
  • Current Assets
  • Stock 15m
  • Debtors 5m
  • Current Liabilities -10m
  • LT Liabilities -10m
  • 25m
  • Capital 20m
  • PROFITS 5m
  • 25m

5m Loan taken out in final part of year 1st
payment not yet due.
19
Creative Accounting - Motivation
  • Hide volatility of profits thereby reducing
    perceived risk in organisation
  • Delay tax burden
  • Increase personal rewards where linked to profits
  • Improve perceived wealth of company
  • Deceive stakeholders
  • Move blame for poor results onto predecessor (or
    successor)

20
Monitoring
  • Given the existence of a multiplicity of
    frameworks, one question which needs to be asked
    is How is it that these anomalies are not
    picked up during the auditing process?
  • One answer to this may be that in many cases the
    firm appointed to do the auditing has close links
    with the firm which does the accounting.

21
The Role of Auditors
  • Role conflict should be objective but are also
    a supplier
  • Often unable to detect fraud
  • Frequently reluctant to report fraud
  • Suffer from lack of accountability and
    independence
  • Insist on self-regulation
  • Subject to competitive pressures

22
Auditors unprofessional behaviour
  • Allocating insufficient time due to budget
    restraints
  • Accepting weak client explanations
  • Focusing on completion deadlines instead of
    thoroughness
  • Excluding awkward items from samples
  • Accepting doubtful evidence from clients
  • Conflict of interests

23
How is Deviant Practice Uncovered?
  • If the movements of money are a one-off, simple
    shift from one reporting period to another, this
    may never be detected. This is the primary
    motivation.
  • However, invariably when this has been done once,
    it needs to be repeated. This creates a downward
    spiral from which it is difficult to recover.
  • In many cases, it is employees who are required
    to construct or falsify records who alert the
    press or authorities .
  • Such people are called Whistle blowers

24
Whistle blowing
  • Financial management provides privileged view of
    the organisations dealings
  • Deviant managerial procedures may become apparent
  • E.g. Use of company assets for personal use
  • Hiding income from tax or vat
    authorities
  • Breaking of reporting regulations
  • Over-valuing (or under-valuing) of
    stock
  • Damages for whistle blower could be loss of
    reputation personal liability dismissal

25
Section C
  • Ethical Accounting Practice

26
Corporate Social Reporting
  • Organisations ought to be answerable to
    stakeholders
  • Currently, regulations only relate to financial
    reporting
  • Other information is only given selectively or
    for PR
  • Suggested five elements of CSR
  • Environmental reporting
  • Fair business practices (e.g. to
    employees/suppliers)
  • Community involvement
  • Products safety and impact
  • Social policy

27
Accounting for the environment
  • Adopting environmental policies
  • Carrying out environmental audits
  • Controlling energy costs and waste
  • Packaging and recycling
  • Life cycle analysis
  • Ethical borrowing and investment
  • Social audits
  • Incorporating sustainability in organisational
    priorities

28
Managing Finance and Budgets
  • EVALUATION
  • There is a short questionnaire to fill in on the
    module.
  • The purpose behind the questionnaire is to
    examine correlations between your academic
    experience on the module and other factors.
  • These factors may include gender, country of
    origin, previous experience of finances, time
    allocated to study, etc.
  • I aim to make changes to the module for next
    year. This will allow me to focus energy
    precisely where it is needed.

29
Managing Finance and Budgets
  • THE END!
  • GOOD BYE, THANKS AND GOOD LUCK
  • MAY SEE YOU NEXT TERM
  • for
  • SPREADSHEETS IN FINANCE FORECASTING
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