Accounting Theory Course
- 2. Md. Mahbubul Islam ID: 114451
- 3. Topics of presentation 10 major corporate financial scandals. GAAP vs. IFRS. Accounting treatment that doesn’t follow GAAP. Accounting as an Ideology. Grounded theory. Theories of regulation. Life of Max Weber. Big-bath theory. Window dressing. Intellectual Capital Accounting. Human Resources Accounting.
- 4. Topics of presentation Definition of Justice. Accounting means Accountability…??? Rules of securities & Exchange Commission regarding Public Limited Companies’ financial disclosures. Code of Ethics for ICAB & ICMAB. Financial Reporting Act-2015 in Bangladesh.
- 5. 10 major corporate financial scandals Waste Management Scandal (1998) Company: Houston-based publicly traded waste management company What happened: Reported $1.7 billion in fake earnings. Main players: Founder/CEO/Chairman Dean L. Buntrock and other top executives; Arthur Andersen Company (auditors) How they did it: The company allegedly falsely increased the depreciation time length for their property, plant and equipment on the balance sheets. How they got caught: A new CEO and management team went through the books. Penalties: Settled a shareholder class-action suit for $457 million. SEC fined Arthur Andersen $7 million. Fun fact: After the scandal, new CEO A. Maurice Meyers set up an anonymous company hotline where employees could report dishonest or improper behavior.
- 6. 10 major corporate financial scandals Enron Scandal (2001) Company: Houston-based commodities, energy and service corporation What happened: Shareholders lost $74 billion, thousands of employees and investors lost their retirement accounts, and many employees lost their jobs. Main players: CEO Jeff Skilling and former CEO Ken Lay. How they did it: Kept huge debts off balance sheets. How they got caught: Turned in by internal whistleblower Sherron Watkins; high stock prices fueled external suspicions. Penalties: Lay died before serving time; Skilling got 24 years in prison. The company filed for bankruptcy. Arthur Andersen was found guilty of fudging Enron's accounts. Fun fact: Fortune Magazine named Enron "America's Most Innovative Company" 6 years in a row prior to the scandal.
- 7. 10 major corporate financial scandals World Com Scandal (2002) Company: Telecommunications company; now MCI, Inc. What happened: Inflated assets by as much as $11 billion, leading to 30,000 lost jobs and $180 billion in losses for investors. Main player: CEO Bernie Ebbers. How he did it: Underreported line costs by capitalizing rather than expensing and inflated revenues with fake accounting entries. How he got caught: WorldCom's internal auditing department uncovered $3.8 billion of fraud. Penalties: CFO was fired, controller resigned, and the company filed for bankruptcy. Ebbers sentenced to 25 years for fraud, conspiracy and filing false documents with regulators. Fun fact: Within weeks of the scandal, Congress passed the Sarbanes-Oxley Act, introducing the most sweeping set of new business regulations since the 1930s.
- 8. 10 major corporate financial scandals Tyco Scandal (2002) Company: New Jersey-based blue-chip Swiss security systems. What happened: CEO and CFO stole $150 million and inflated company income by $500 million. Main players: CEO Dennis Kozlowski and former CFO Mark Swartz. How they did it: Siphoned money through unapproved loans and fraudulent stock sales. Money was smuggled out of company disguised as executive bonuses or benefits. How they got caught: SEC and Manhattan D.A. investigations uncovered questionable accounting practices, including large loans made to Kozlowski that were then forgiven. Penalties: Kozlowski and Swartz were sentenced to 8-25 years in prison. A class-action lawsuit forced Tyco to pay $2.92 billion to investors. Fun fact: At the height of the scandal Kozlowski threw a $2 million birthday party for his wife on a Mediterranean island, complete with a Jimmy Buffet performance.
- 9. 10 major corporate financial scandals Health South Scandal (2003) Company: Largest publicly traded health care company in the U.S. What happened: Earnings numbers were allegedly inflated $1.4 billion to meet stockholder expectations. Main player: CEO Richard Scrushy. How he did it: Allegedly told underlings to make up numbers and transactions from 1996-2003. How he got caught: Sold $75 million in stock a day before the company posted a huge loss, triggering SEC suspicions. Penalties: Scrushy was acquitted of all 36 counts of accounting fraud, but convicted of bribing the governor of Alabama, leading to a 7-year prison sentence. Fun fact: Scrushy now works as a motivational speaker and maintains his innocence.
- 10. 10 major corporate financial scandals Freddie Mac (2003) Company: Federally backed mortgage-financing giant. What happened: $5 billion in earnings were misstated. Main players: President/COO David Glenn, Chairman/CEO Leland Brendsel, ex-CFO Vaughn Clarke, former senior VPs Robert Dean and Nazir Dossani. How they did it: Intentionally misstated and understated earnings on the books. How they got caught: An SEC investigation. Penalties: $125 million in fines and the firing of Glenn, Clarke and Brendsel. Fun fact: 1 year later, the other federally backed mortgage financing company, Fannie Mae, was caught in an equally stunning accounting scandal.
- 11. 10 major corporate financial scandals American International Group (AIG) Scandal (2005) Company: Multinational insurance corporation. What happened: Massive accounting fraud to the tune of $3.9 billion was alleged, along with bid-rigging and stock price manipulation. Main player: CEO Hank Greenberg. How he did it: Allegedly booked loans as revenue, steered clients to insurers with whom AIG had payoff agreements, and told traders to inflate AIG stock price. How he got caught: SEC regulator investigations, possibly tipped off by a whistleblower. Penalties: Settled with the SEC for $10 million in 2003 and $1.64 billion in 2006, with a Louisiana pension fund for $115 million, and with 3 Ohio pension funds for $725 million. Greenberg was fired, but has faced no criminal charges. Fun fact: After posting the largest quarterly corporate loss in history in 2008 ($61.7 billion) and getting bailed out with taxpayer dollars, AIG execs rewarded themselves with over $165 million in bonuses.
- 12. 10 major corporate financial scandals Lehman Brothers Scandal (2008) Company: Global financial services firm. What happened: Hid over $50 billion in loans disguised as sales. Main players: Lehman executives and the company's auditors, Ernst & Young. How they did it: Allegedly sold toxic assets to Cayman Island banks with the understanding that they would be bought back eventually. Created the impression Lehman had $50 billion more cash and $50 billion less in toxic assets than it really did. How they got caught: Went bankrupt. Penalties: Forced into the largest bankruptcy in U.S. history. SEC didn't prosecute due to lack of evidence. Fun fact: In 2007 Lehman Brothers was ranked the #1 "Most Admired Securities Firm" by Fortune Magazine.
- 13. 10 major corporate financial scandals Bernie Madoff Scandal (2008) Company: Bernard L. Madoff Investment Securities LLC was a Wall Street investment firm founded by Madoff. What happened: Tricked investors out of $64.8 billion through the largest Ponzi scheme in history. Main players: Bernie Madoff, his accountant, David Friehling, and Frank DiPascalli. How they did it: Investors were paid returns out of their own money or that of other investors rather than from profits. How they got caught: Madoff told his sons about his scheme and they reported him to the SEC. He was arrested the next day. Penalties: 150 years in prison for Madoff + $170 billion restitution. Prison time for Friehling and DiPascalli. Fun fact: Madoff's fraud was revealed just months after the 2008 U.S. financial collapse
- 14. 10 major corporate financial scandals Satyam Scandal (2009) Company: Indian IT services and back-office accounting firm. What happened: Falsely boosted revenue by $1.5 billion. Main player: Founder/Chairman Ramalinga Raju. How he did it: Falsified revenues, margins and cash balances to the tune of 50 billion rupees. How he got caught: Admitted the fraud in a letter to the company's board of directors. Penalties: Raju and his brother charged with breach of trust, conspiracy, cheating and falsification of records. Released after the Central Bureau of Investigation failed to file charges on time. Fun fact: In 2011 Ramalinga Raju's wife published a book of his existentialist, free-verse poetry.
- 16. Examples regarding the conflicts between GAAP & IFRS 1. Inventory: Under IFRS , LIFO can’t be used but under GAAP you have to choose between LIFO and FIFO. 2. Consolidation: IFRS prefers a control model whereas GAAP prefers a risk and return model. 3. Statement of Income: Extra-ordinary items aren’t segregated in the income statement but under GAAP it is shown in the net income. 4. EPS: Under IFRS the calculation of EPS doesn’t average the individual interim period calculation whereas under GAAP the computation average the individual interim period incremental shares. 5. Development cost: Cost can be capitalized under IFRS but under GAAP it is considered as expense.
- 17. Accounting Treatment that doesn’t follow GAAP A non-GAAP financial measure is a numerical measure that adjusts the most directly comparable measure determination in accordance with GAAP. Such measures provide supplemental information regarding a company historical or further financial position, financial performance, cash-flow or liquidity. For PLC non GAAP financial measures are governed by the SEC regulation. Non-GAAP financial measures may disaggregate different aspect of a company’s operation or remove the effect of large usual or unique transaction such as acquisition or disposition.
- 18. Common non- GAAP financial measures: Earning Per Share (EPS). Earning Before Interest, Tax, Depreciation & Amortization. Adjusted Earning or Adjusted EPS. Net Debt.
- 19. Accounting as an Ideology Ideology can be described as a set of conscious or unconscious ideas which make up one’s beliefs, goals, expectations and motivations. So ideology is a comprehensive normative vision. Whereas Accounting is the measurement, processing and communicating required financial information about an economic entity with interested persons.
- 20. Grounded theory Grounded theory is a general methodology, a way of thinking about and conceptualizing data. Grounded theory is also a research methodology which operates almost in a reserve fashion from social science research in the positive tradition. This theory was developed by two sociologists Barry Gloser and Anslsm Straus in 1965.
- 21. Fields of Grounded Theory In psychology, it is delayed used to understand the role of the repetitive distance for the adult clients with attached anxiety. In sociology, it is used to discover the meaning of spiritually in cancer patients. In software engineering, grounded theory has been used to study daily stand up meetings.
- 22. Theories of Regulation Any kind of regulation is generally assumed to be attained by a given industry and is designed & operated primarily for its benefits. There are two major categories of regulation: Public interest theories The interest group or capture theories
- 23. Public interest theories The theory was developed by A.C Pigou in 1932. The theory assumes that the market is extremely fragile and opt to operate very inefficiently. Here regulation is supplied in response to the demand of public for the correction of inefficient or equitable market. Purpose is social welfare. Applied in regulated market. The government is the neutral arbiter.
- 24. The interest group or capture theories Here regulation is supplied in response to the demand of special interest group. Applied in unregulated market. Maximize the benefit of special group. It fits the economic principles of Adam Smith.
- 25. Max Weber Born: Kerl Emil Maximilion Weber was born on 21st April 1864 in Erfurt, Saxany, Prussia. Died: At the age of 56, he died at Munich, Bavaria, Germany on 14 June 1920. Nationality: Prissia (1864-1871), German Empire (1871-1918), Weihar Republic (1918-1920). Work fields: Economics, Sociology, History , Law, Politics & Philosophy.
- 26. Max Weber Institution: University of Berlin, Friburg University of Vienna, University of Munich. Major Publications: i. The protestant Ethic &Sprit of Capitalism.(1912) ii. The city(1912) iii. The Sociology of Religion(1922) iv. General Economic History(1923) v. The Theory of Social &Economic(1923)
- 27. Big Bath Theory The practice of making poor earnings of a company, specially of a PLC appears worse than they really are. It can be done through Witten off, prepaid expense and so forth. Manipulation of a company’s income statement to make poor results look even worse to make future results better . It is often implemented in a bad year for a company to enhance the next years earning in an artificial manner.
- 28. Window dressing A strategy used by mutual fund and other portfolio managers near the year or quarter end to improve the appearance of a fund’s performance before presenting it to clients or shareholders. To window dress near the end of the quarter the securities are then reported as part of the fund’s holidays.
- 29. Intellectual Capital Accounting Intellectual capital is the sum of everything in a company knows that gives it a competitive edge. The term is used in academia in an attempt to account for the value of intangible assets not listed explicitly on a company’s balance sheet. Intellectual capital is presented by brands, products or competitive advantages. It is considered as an asset ,and can broadly be defined as the collection of information about resources.
- 30. Human Resource Accounting (HRA) Human Assets Accounting or Man-power Accounting Process of identifying and measuring data about human resources and communicating this information to interested parties.” It emphasized the need for measuring the cost of recruitment, selection, and development of human resources by an organization.
- 31. Definition of Justice According to Socrates, justice is like that to be just (good) taken time, morality or to be unjust (evil) takes shrewdness, deceptiveness and manipulation. According to Plato, justice is not just something external that is used in society, but it is an internal or even natural or condition that can be found almost in everywhere. In my opinion, justice is to develop a theory to be applied to the development of the society and to develop a process of distribution based on need, merit, or work and to provide a rational justification for morality in people's generic features focusing on freedom & well- being and avoiding self-contradiction.
- 32. Accounting means accountability ?? Accounting is the measurement, processing and communicating required financial information about an economic entity with interested persons. Whereas accountability is a virtue of some person which is more similar with responsibility bearing, time keeping, resolving the assigned task faithfully etc. In modern business world, managers don’t perform their duties properly, faithfully, and for the benefit of shareholders . that creates agency problem, although they are responsible for their any activities.
- 33. Rules of SEC regarding PLC financial disclosures: SEC regulation requires publicly owned companies have to disclose certain type of business and financial data on a regular basis to the SEC. Financial information to the potential investors and to the stakeholders when the new securities are issued to the general people although expectation are made for small issue and private placement.
- 34. Code of ethics for ICAB & ICMAB The code of ethics is applicable to all accountants in diverse fields, provide separate section for professional accountants in public practice as well as in business. The code is currently reviewed by a steering committee appointed by the IFAC ethics committee. Professional accountants(PA) must apply safeguard, morality to eliminate threats to ensure that ethical compliance is never compromised. The Code establishes a regional model, with the recommendation that no SAFA Member Body or firm applies less stringent standards than those stated in the Code unless the law, regulation or culture of a SAFA Member Body provides otherwise.
- 35. Financial Reporting Act (FRA) in Bangladesh-2015 To ensure transparency and accountability in financial reporting. To evaluate and regulate the performance of professional accountants of ICAB & ICMAB. To ensure the trustworthy and authenticity of the published accounts of the public and private companies. To ensure audit quality and setting standards, with a view to developing strategic advice to the authenticity of the authority and stakeholders on these issues. Recognized by the cost and management audit of the public entities. ICAB & ICMAB supported the govt. to enact FRA.
- 36. Major elements of FRA-2015 Section 2 (18) - Professional Accountant: Professional Accountant means the member of ICAB and ICMAB. Section 2 (19) - Professional Accountancy Institution: Professional Accountancy institution means ICAB and ICMAB. Section 3- Establishment of Council: The Act aims at inspiring the auditing and accounting system of the country's financial institutions to international standards, and under the Act, FRC comprising of 12 members will be established, led by a Chairman appointed by the Government. Moreover, the council will be a statutory body with members from various government bodies, institutions and professional groups.
- 37. Major elements of FRA-2015 Section 7- The General Objectives of the Council: The objectives of the FRC would be: (a) To determine the code of ethics, standards of accounting and auditing profession; (b) To improve the quality of accountancy and audit services ; (c) To improve the accounting and auditing profession; (d) To ensure the highest quality of accounting and auditing of listed auditors of the council; (e) To enhance the credibility of financial reporting; (f) To ensure the transparency and accountability of functions of accounting and auditing profession; and (g) To motivate for preparing the high quality reporting of financial and nonfinancial information by public interest entities.
- 38. Major elements of FRA-2015 Section 16- The duties and Responsibilities of Chairman of the Council: The duties and responsibilities of Chairman of the council will be the following: (a) Conducting administration of the council; (b) Conducting and organizing effectively the activities and matters determined by the council; (c) Preparing annual budget and program; and (d) Performing other duties given time to time by the council.
- 39. Major elements of FRA-2015 Section 21- Annual Report of the Council: Council shall submit an annual report on its immediate preceding year’s functions to the Government within 3 months from the completion its fiscal year. The following matters shall be included in annual report: (a) Accounts of annual revenues and expenses and related information; (b) Details analysis of the functions of the council; (c) Statement of the achieved goals of the council; (d) Statement of the non-achieved goals with reasons; (e) Statement of brief description of the members of the council and their honorees and other facilities; and (f) Statement of the attendance of members of meeting of the council.
- 40. Major elements of FRA-2015 Section 22-26- Divisions of the Council and Duties of the Divisions: Under the Act, activities of the FRC will be done through the following four serviceable divisions:
- 41. Division & Duties of the Division a. Standards Setting Division: (i) Preparing effective proposal of setting, renewal and developing of financial reporting, value determination, actuarial standards, auditing standards in accordance with the rules and regulations of this act; and (ii) Presenting this proposal in the council for approval. b. Financial Reporting Monitoring Division: (i) Monitoring, analyzing and identifying whether or not any financial reporting standards, auditing standards, code or guidelines of this act or any other act are complied effectively by the public-interest oversight.
- 42. Division & Duties of the Division c. Audit Practice Review Division: (i) Monitoring of audit practice related functions of professional accountancy firms; (ii) Reviewing of audit practice of any firm that helps to the randomly selected auditor or audit firm; (iii) Determining whether or not the firm has complied of audit practice code or auditing standards of this act; (iv) Reviewing the control system of the related firm at least once every 3 years; and (v) Reviewing whether or not the related firm has taken necessary steps for developing the accounting profession keeping the professional quality.
- 43. Division & Duties of the Division d. Enforcement Division: (i) Considering the opinions and recommendations given by the other division of the council or any other subject matter relating failure or non-compliance of standards of any acts given directly by any other organizations to the council; (ii) Recommending to take possible punishable action for that failure or non-compliance; and (iii) Informing it to the related parties.
- 44. Major elements of FRA-2015 Section 28- Professional Behavior and Code of Ethics: Council may set Professional behavior and code of ethics for its members and employees with a view to establishing professional behavior for their individual duties and responsibilities. Section 31- Registration with Financial Reporting Council: After the establishment of the FRC, all auditors and audit firms must register in the FRC. Without registration, no auditor and audit firm will be able to provide auditing service to any entity related with public interest.
- 45. Major elements of FRA-2015 Section 32- Application for Registration: For registration, the auditor or audit firm needs to apply to the FRC. The FRC will review the application and will provide the registration to pursue the rules and guidelines. Section 33- Cancellation and Fine of Registration: If any auditor or any audit firm violates any provisions of the act or any of its rules and guidelines, FRC may cancel or suspend the registration and may fine as well.
- 46. Major elements of FRA-2015 Section 40-43- Setting, Monitoring, Publishing of Standards: Its key functions include the oversight of the accounting and auditing standards setting processes for the public and private sectors, providing strategic advice in relation to the quality of auditing and advising the authorities on these and related matters to the extent that they affect the financial reporting framework in Bangladesh. Section 45- Monitoring of Financial Statements and Annual Report: The FRC will be the sole watchdog to monitor the functions of auditors and ensure clearness and responsibility in accounting and auditing of financial organizations.
- 47. Major elements of FRA-2015 Section 46- Review of Audit Practice of the Auditors of Public-Interest Oversight: Council, or any officer authorized by it, in writing may review the audit practice of a listed auditor and may investigate, examine and call all records, documents, balance sheet, cash and bank balance, mortgage, other assets etc. and may make query or call for any information or explanation to any partner, employee or agent. Section 47- Enforcement of Compliance of Financial Reporting and Auditing Standards: Council shall give order to change or correct the financial statements under financial reporting and auditing standards to the public- interest oversight if it fails to comply with the financial reporting and auditing standards, code or guideline.
- 48. Major elements of FRA-2015 Section 48- Offence and Punishment: If anyone has got registration as a auditor by breaking any condition of FRA 2015 or its section, sub-section, guidelines, standards or by fraudulent way or by providing false information or breaks any rule of this act, then it will be treated as an offence and s/he will be punishable for imprisonment not exceeding 5 years or not exceeding taka 5, 00,000 (five lac) or both. Section 54- Appeal Authority: Government may form an appeal authority, published by gazette, for hearing appeal under FRA 2015 and it will be called book keeping and audit appeal authority.