Question

1. Valley View Manufacturing Inc. sought a $500,000 loan from First National Bank. First National insisted that audited financial statements be submitted before it would extend credit. Valley View agreed to do so, and an audit was performed by an independent CPA who submitted her report to Valley View. First National, upon reviewing the audited statements, decided to extend the credit desired. Certain ratios used by First National in reaching its decision were extremely positive indicating a strong cash flow. It was subsequently learned that the CPA, despite the exercise of reasonable care, had failed to discover a sophisticated embezzlement scheme by Valley View’s chief accountant. Under these circumstances, what liability might the CPA have?

2. What are the costs and benefits of establishing one set of accounting standards (i.e., IFRS) around the world? How do cultural factors, legal systems, and ethics influence your answer? Apply a utilitarian approach in making the analysis.

Answer 1

1.Under the situation, if due care and competency is shown by the CPA, in the performance of the audit, the CPA would not be liable. The CPA will need to show that the audit was planned and performed to detect material misstatements, but that it is not absolute assurance that all misstatements, and especially sophisticated embezzlement by the chief accountant, will be discovered. The CPA would be liable to Valley View for ordinary negligence. The CPA would be liable to the creditor for gross negligence or fraud only. The creditor was not a foreseen or reasonable foreseeable third party but would be considered the foreseeable user. Therefore, under the liberal Rosenblum ruling, the creditor may be viewed as a reasonably foreseeable third-party user since the Valley View did not obtain a loan from National Bank.

2.The benefits of one set of accounting standards to be followed by all companies around the world include the comparability of financial statements, irrespective of the location of the company’s headquarters, global cost of capital, and its ability to raise capital in world-wide markets, not just the home country. The costs of one set of accounting standards is the failure of one set of standards to be 100% compatible with the unique legal, regulatory, litigious, social, economic, religious, and cultural environments of each country. There are some concerns about the enforcement of IFRS. As the U.S. has effective enforcement, it's very difficult to implement stringent enforcement outside the U.S. (as illustrated by the Longtop case) because of the variations in economic (stet-owned enterprises vs. public ownership), legal and regulatory (government versus market controls), and corporate governance differences (government oversight and control versus board of directors, audit committee, internal controls and an external audit).

The more extensive list of benefits and costs of adopting IFRS in the U.S is as follows. Any utilitarian analysis starts with identifying these factors (benefits/harms) and weighing each one’s importance (hard to do) – and then making a decision about the overall net benefits of adoption.

Advantages:

1. Improved transparency. Investors, executives, and managers in different countries should be able to better understand a foreign company’s or multinational’s reports and statements.
2. Uniformity across international boundaries.
3. Better management information, with more visibility into foreign subsidiaries and more transparency.
4. Improved communication among subsidiaries, as their accounting converges in IFRS.
5. Possible cash management advantages.
6. Lowered costs of accounting services due to standardization; one example would be an entity located in a low-tax jurisdiction that can meet the needs of all subsidiaries of a multinational because all will rely on a single accounting and taxation method under IFRS.

Disadvantages

1. Systems will need to be modified to accommodate new charts of accounts. There will likely be a period for US companies of tracking and reporting in both GAAP and IFRS, while also clarifying the variances between the two methods.

2. Education of accounting students in IFRS is lacking; burden placed on firm training creates excessive costs

3. There will be changes to tax, technology, and valuation and these will vary from country to country.