Question

In: Accounting

What are the advantages of preparing financial statements in accordance with GAAP? What are the disadvantages?...

  1. What are the advantages of preparing financial statements in accordance with GAAP? What are the disadvantages?

  1. Is it voluntary for a member of the AICPA to follow the AICPA’s Code of Professional Conduct? Discuss whether you believe this is equitable – Why or Why Not.

  1. Is it voluntary for CPA who is not a member of the AICPA to follow the AICPA’s Code of Professional Conduct? Discuss whether you believe this is equitable – Why or Why Not.

  1. A CPA was convicted of a crime and sentenced to jail for intentionally harming an animal. In most states, does this CPA satisfy the “moral character” standard for continuing to practice as a CPA? Should this CPA be allowed to continue to practice accounting?    

  1. Is it voluntary for a bookkeeper who is not a CPA to follow the AICPA’s Code of Professional Conduct? Discuss whether you believe this is equitable – Why or Why Not.
  1. State and describe the six Principles of the AICPA Code of Professional Conduct.

  1. Research the core principles of the IFAC Code of Conduct and compare them to the Principles of the AICPA Code of Professional Conduct. What are the differences? Are these differences important to you?
  1. What is big bath accounting? How is it abused?

  1. Identify an ethical issue that is in the news. Analyze it from the standpoint of consequentialism.
  1. Do you believe that societal resource allocations based on Rawls’ veil of ignorance should be widely adopted? Discuss your reasons – Why or Why not.

  1. Should corporations be required to disclose in SEC filings their expenditures on improving and maintaining the environment?

  1. How important is the maintenance of a high self-image to you? Provide examples in which you took actions to augment your self-image.

  1. What criticisms do you have of the Becker Rational Model?

  1. Why did the 9/11 attack evoke such a high degree of moral outrage? Analyze it by applying the issue-contingent model.
  1. Discuss the pros and cons of contingency fees from a client’s standpoint.

  1. Discuss the pros and cons of contingency fees from an accountant’s standpoint.

  1. When are contingency fees permissible in rendering tax services? Is this equitable – Why or Why not?

  1. Discuss cookie jar accounting? How is it abused?

  1. What lessons have been learned from the demise of Enron?

Solutions

Expert Solution

1. Generally accepted accounting principles refer to the U.S. guidelines and procedures that accountants or others required to present financial information follow. These include specific principles regarding the presentation and disclosure of certain financial activities, such as revenue recognition and continuity of asset values. The U.S. government requires that publicly traded companies follow GAAP.

Significance

GAAP guidelines help businesses maintain consistency in their presentation of financial information, reduce the risk of misrepresentation and avoid fraud. GAAP was created to safeguard the rights of stakeholders, including investors. It holds companies responsible for their financial reporting activities, thus providing greater assurance to all interested parties. Through the use of GAAP guidelines, companies provide true and fair presentation of financial information.

Consistency

Adhering to GAAP guidelines can help you implement proper controls and safeguards. The fact that the GAAP guidelines suggest using a consistent basis that professionals can apply to accounting transactions illustrates this fact. Consistency leads to a more fair presentation and helps in comparing financial statements across multiple periods. This helps you determine your company’s overall performance, identify areas that need improvement and judge the benefits of changes that you implement.

Stakeholder's Trust

Presenting your information using GAAP also helps to instill trust in those with an interest in your company. There are many possible ways to manipulate the financial information of a company, and many times, a simple modification to the way things are presented changes the face of financial statements. These changes can cause the reader to interpret the statements differently than if the modifications were not applied. Complying with GAAP guidelines gives assurance to anyone interested in your company that your financial statements were prepared using standard guidelines.

Comparable Statements

Investors and other interested parties can compare financial information of across different companies because GAAP provides standardized guidelines that accounting, auditing and financial professionals follow. This means that you can draw realistic conclusions about your company’s performance, as the accounting principles that you use are consistent with those of your competitors. If GAAP guidelines were not applied, a high profit shown by one company might not be comparable to a company showing lesser returns because of a difference in the revenue-recognition method. One company might have higher profits than another in true terms; however, the lack of standardization makes comparing the two results difficult.

disadvantages

•GAAP accounting provides management with a lot of tools in presenting the companies financial position. Such treatments for depreciation, deferred taxes, and amortization for R&D to name a few can be altered to present a smoothed picture of a company. The reality is companies do not operate this way. They are subject to the whims and flows of changing consumer demand, external economic fundamentals, constraints in managing their scarce capital.

•As a result GAAP accounting is limited in that doesn’t necessarily present the economic reality the company is operating.

• GAAP accounting nudges companies to prepare financial statements that appeal to creditors rather than shareholders. For equity investors, GAAP accounting provides a manipulated and not necessarily accurate snapshot of the companies financial position and performance

2.  Membership in the American Institute of Certified Public Accountants is voluntary. By accepting membership, a certified public accountant assumes an obligation of self-discipline above and beyond the requirements of laws and regulations. These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession's recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.

3. CPAs are licensed and regulated by their state boards of accountancy. Additionally, all AICPA members are required to follow a rigorous Code of Professional Conduct which requires that they act with integrity, objectivity, due care, competence, fully disclose any conflicts of interest (and obtain client consent if a conflict exists), maintain client confidentiality, disclose to the client any commission or referral fees, and serve the public interest when providing financial services. The vast majority of state boards of accountancy have adopted the AICPA Code of Professional Conduct within their state accountancy laws or have created their own.

6.

Responsibilities

"In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities."

This principle directs accountants to work collaboratively with other accountants to improve both the image and practices of accounting. Part of that responsibility includes public education, helping both clients and the general public understand the role, standards and limitations of accountants.

The Public Interest

"Members should accept the obligation to act in a way that will serve the public interest, honor the public trust and demonstrate commitment to professionalism."

Rather than advocating for one segment of what constitutes accounting's public -- clients and employers, creditors, governments, investors, and the business and financial community at large -- accountants must strive to represent the collective well-being of all those parties. Bottom line: When the overall public good is served by employing all of accounting's guiding principles, the best interests of an accountant's client or employer get served in the process.

Integrity

"To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity."

It's easy enough to say accountants shouldn't stick phony numbers in a balance sheet. More to the point, accountants also need to avoid even subtle misrepresentations, including misstatements by omission or by ignoring obtainable information, in carrying out their duties. An accountant should never stop short of obtaining all sufficient data to provide a reasonable foundation for his conclusions or recommendations.

Objectivity and Independence

"A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services."

Independence governs an accountant's ability to work with integrity and objectivity. Independence also is highly subjective. Although an accountant may demonstrate independence in appearance, acting independently in fact requires an accountant to be free of even potential conflict, both in action and in mental attitude, a particularly immeasurable standard. The institute suggests a pragmatic approach in dealing with independence, allowing an accountant to footnote a job report disclosing possible -- even potentially implied -- lapses in independence.

Due Care

"A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability."

This principle exhorts accountants to regularly pursue continuing education, especially regarding generally accepted practices in the profession. It also expands the definition of responsible and ethical work to include offering service only in the accountant's area of competence and within her level of expertise.

Scope and Nature of Services

"A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided."

To forestall problems arising during the performance of a job, this principle encourages accountants to accept jobs only from clients willing to work within the technical, ethical and professional standards included in the guiding principles.

8.

A big bath is an accounting term that is defined by a company's management team knowingly manipulating its income statement to make poor results look even worse in order to make future results appear better. It is often implemented in a relatively bad year so that a company can enhance the next year's earnings in an artificial manner.

  • A big bath is an unethical accounting tactic whereby income in a bad year is made to look even worse than it actually is.
  • Often undertaken in a bad earnings year, this tactic is intended to artificially inflate future earnings figures.
  • Various techniques can be employed to carry out a big bath without breaking the law, where it can enrich corporate managers in the following years as bonuses are often tied to earnings performance.

How Firms Can missuse a Big Bath-

If a CEO concludes the minimum earnings targets cannot be made in a given year, he has an incentive to move earnings from the present to the future because the CEO's compensation does not change regardless if he misses the targets by a little or a lot.

The CEO can shift profits forward in several ways: by prepaying expenses, taking write-offs, or delaying the realization of revenues. By taking on these measures in a big bath maneuver, the CEO increases the chances of getting a large bonus the following year. Prepaying expenses and taking write-offs are particularly useful in a big bath scenario.

Banks can also engage in a big bath. Banks typically face rising delinquency and default rates on loans when the economy goes into recession and unemployment rises. These banks often write off the loans beforehand in anticipation of the losses and create a loan loss reserve. A bank can effectively create a big bath and be liberal with the loan loss provision as its earnings are hurt by tough economic times.

When the economy recovers and loan payments are paid on time and in greater numbers, the bank can reverse the losses in the loan loss reserve that were not realized and boost earnings in future quarters. Management can benefit from higher compensation, and the bank's share price can recover from a fall during tough financial times.

15.  The Advantages of Using Contingency Fees-

Contingency fee arrangements have several advantages for clients:

  • No Up-front Fees. One large advantage to using a contingency fee arrangement for a case is that you do not have to pay your lawyer up front, and you are not faced with huge legal bills while your case is still ongoing. Many people believe that this helps give those with lower incomes better access to legal assistance and the court system.
    • Incentive. You can rest assured that your attorney will give their utmost to your case. If they don’t get paid unless you get paid, your attorney will be highly motivated to do everything in their power in order to get you the best possible result.
  • No Costs for Losses. Another advantage to using a contingency fee arrangement is that if the case does not come out as you hope, you don’t have to worry about paying a hefty attorney’s fee (although you may still be responsible for some administrative costs). This may provide some people with peace of mind–if the lawyer is willing to risk not collecting a fee for the work they put into things, you probably have a good chance of winning your case.

The Disadvantages of Using Contingency Fees-

Of course, as with anything, there are certain disadvantages to contingency fees, as well. A contingency fee arrangement could potentially cost you more than a regular hourly fee. Once you agree on the contingency fee, you owe the agreed upon percentage no matter how long the case will take–whether it takes a year or a week. This is especially true in clear-cut cases that may only require a few phone calls and a couple of hours of work in order to settle. Make sure you discuss your options with your attorney before you make a decision. Some attorneys may offer a flexible contingency fee depending on the outcome of your case.

When attorneys take cases on a contingency basis, they may be more selective about the cases they agree to take on. They may try to avoid cases that they don’t see as easy victories, or may negotiate higher fees for “riskier” cases.

19.

Cookie jar accounting or cookie jar reserves is an accounting practice in which a company takes a quantity of large reserves from an economically successful year and incurs them against losses from less successful years. Through this process, companies can mislead investors into believing that their losses are less than the actual value.

An example of a cookie jar reserve is a liability created when a company records an expense that is not directly linked to a specific accounting period—the expense may fall in one period or another. Companies may record such discretionary expense when profits are high because they can afford to take the hit to income. When profits are low, the company reduces the liability (the reserve) rather than recording an expense in the lean year.

20.  

The Enron scandal provides a fascinating case study on corporate governance and board room management.

One of the best reasons to study history is to avoid making mistakes that have already occurred in the past.

Five actionable lessons that investors can take away from this unfortunate bankruptcy are:

  1. Don’t invest in what you can’t understand
  2. Avoid companies that employ fancy derivatives
  3. Beware of excessive leverage
  4. Understand and assess counterparty risk
  5. The importance of management integrity cannot be understated.

Related Solutions

In addition to preparing financial statements in accordance with GAAP, U.S. companies may be required, in...
In addition to preparing financial statements in accordance with GAAP, U.S. companies may be required, in the near future, to prepare financial statements according to International Financial Reporting Standards (IFRS). If the United States adopted IFRS standards, what would be the advantages and disadvantages? Does it make sense for U.S. companies to change to IFRS? How would IFRS impact a comparative analysis of an organization's financial statements?
If the cash basis and cash basis financial statements are not in accordance with GAAP, why...
If the cash basis and cash basis financial statements are not in accordance with GAAP, why are they allowed?
List the reasons for preparing pro forma financial statements from GAAP financial statements. What are typical...
List the reasons for preparing pro forma financial statements from GAAP financial statements. What are typical adjustments made to GAAP statements when preparing pro forma statements used in forecasting?
What are GAAP requirements for preparing financial statements? Use the following adjusted trial balance for Decatur...
What are GAAP requirements for preparing financial statements? Use the following adjusted trial balance for Decatur Health Clinic to Create a statement of financial position, statement of functional expenses, statement of activities, and statement of cash flows: Decatur Health Clinic Adjusted Trial Balance As of June 30, 20X7 Cash 150,500 Pledges Receivable-Unrestricted 36,000 Estimated Uncollectible Pledges 2,300 Inventory 2,800 Investment 178,000 Furniture and Equipment 210,000 Accumulated Depreciation-Furniture and Equipment 125,000 Accounts payable 20,520 Unrestricted Net Assets 206,500 Temporarily Restricted Net...
What are GAAP requirements for preparing financial statements? Use the following adjusted trial balance for Decatur...
What are GAAP requirements for preparing financial statements? Use the following adjusted trial balance for Decatur Health Clinic to Create a statement of financial position, statement of functional expenses, statement of activities, and statement of cash flows Decatur Health Clinic Adjusted Trial Balance As of June 30, 20X7 Debits Credits Cash 150,500 Pledges Receivable-Unrestricted 36,000 Estimated Uncollectible Pledges 2,300 Inventory 2,800 Investment 178,000 Furniture and Equipment 210,000 Accumulated Depreciation-Furniture and Equipment 125,000 Accounts payable 20,520 Unrestricted Net Assets 206,500 Temporarily...
What are the Advantages and Disadvantages of Financial Ratios?
What are the Advantages and Disadvantages of Financial Ratios?
Explain the advantages and disadvantages of financial statements. (need 500-600 words)
Explain the advantages and disadvantages of financial statements. (need 500-600 words)
In preparing financial statements in accordance with IFRS, there are certain accounting policies that may require a judgment or estimation in their application.
In preparing financial statements in accordance with IFRS, there are certain accounting policies that may require a judgment or estimation in their application. Give examples of Aramco estimates and assumptions reported in consolidated financial statements.
What are the advantages and disadvantages of brick-and-mortar stores? What are the advantages and disadvantages of...
What are the advantages and disadvantages of brick-and-mortar stores? What are the advantages and disadvantages of online stores? Which are there more of and how will this trend continue? Please answer in complete sentences with an overall total of 150 words or more.
Under GAAP, companies may apply various valuation methods in recording transactions and preparing financial statements, for...
Under GAAP, companies may apply various valuation methods in recording transactions and preparing financial statements, for example historical cost, fair market, replacement, depreciated or amortized cost, etc. For each basis in your discussion, cover its definition, describe in general terms when it is proper to use it, and critique the advantages and disadvantages of its use. Address the issue of why we should (or should not) use so many different valuation bases in GAAP. Is it accurate to claim that...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT