Current Issues in Accounting
The issues of corporate governance such as corruption, bribery, growth and strategy, succession planning, IT governance, and financial regulatory framework is the focus of the regulators and policymakers. The regulators seek to ensure that there is accountability, transparency, and shareholders participation on boardroom decisions (Harris, 2007, p10). The policymakers should ensure that mergers and acquisition, climate change and sustainability, proxy access, and executive compensation are regulated. The rules and regulations should be developed to ensure that this issues are addressed since they affect business performance. Similarly, there are concerns about the fair value accounting as the concepts treats operating businesses inappropriately (Morgan, 2014, p22). The security view and banking view are the main concerns. The banking view entails the businesses that generates net cash flow overtime, on the other hand, the security view are concern raised by security brokers whose activities is selling securities (Staubus, 2012, p31). Therefore, the policy makers should ensure that this issues feature in their reform plans. Moreover, tax avoidance and evasion affects the ability of the country to provide services to the society and businesses.
Financial reporting and accounting standards were based on vague conventions and principles, before the advent of the conceptual framework (Morgan, 2014, p77). The principles such as prudence, Fairview, historical cost, matching, conservatism, and earning process were difficult to understand. This provided loopholes for the auditors and accountants to provide false reporting on the financial position of a firm. Inherently, a robust set of rules and concepts should be developed to reflect the underlying economic situation (Wolk, 2011. p.13). It can be observed that the institutions and persons mandated to develop the accounting rules and principles based on consensus in practice and not eliminating the undesirable practice. Notably, the frame of reference has been on the personal and implicit help conceptual framework (McGregor, 2014, 56). Consequently, the decision tends to be inconsistent, ad hoc, and unrelated. Reviewing the conceptual framework proffers the opportunity to translate the relevant concepts. This is critical in reducing the perceived differences and strengthen the existing conclusions to be consistent at the standard level.
Policymakers and regulators mandated to develop new rules and regulations should ensure that they identify the measurement basis, fair value accounting, and corporate governance is factored in the reforms (Staubus, 2012, p46). They should ensure that public corporation share information to the public, such the profit and loss accounts. This is critical since it will provide useful information for the users of the financial statement. Moreover, the current framework does not have the sections that elaborates on the disclosures and presentations (Morgan, 2014, p70). This is a critical area they should examine given the existing problems are facing while developing disclosure and presentation issues. Disclosure concepts should be based on higher levels of framework. Arguably, the role of business models is pervasive in financial reporting; they have competing theories such as theory of the firm (Parker, 2012, p.45). The economic theory assumes that the business environment has no fraud, transaction cost, and market information is perfect. Similarly, the theory of the firm argues that accounting is a means of decreasing transaction cost. The problem with these theories is the measurement issues
Hoogervorst (2014) says that the root of problem in the current accounting policies and principles lies on the moral hazards of the financial markets. According to him, the credit and capital market are rife with the agency conflict. Therefore, the auditors and the accountants use the loopholes to commit fraud. The conflict of interest affects their productivity and the performance of the firm. Hoogervorst (2014) states that, “conflicts. There is a high potential for conflicts of interest wherever people work with other people’s money. Moral hazard becomes even bigger, when there is an asymmetry of information, when the agent has more information than the principal.” Hoogervorst (2014) says that lack of transparency and fraud is a scoured that is destroying the financial market. The current financial crisis provides insights to the risks unprecedented to market boom and financial institution. He says that, the aim of the IFRS is, “to develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles.” Therefore, reporting standards requires transparency, quality, and comparable information.
Needles (2013) says that accounting policies should be able to solve agency problem. The agency problem is a concept based on the issues that arise since the business are managed by the Directors who are not owners of the business but represent Shareholders “the actual owners”. The problem arises when the agents do not agree with the shareholders on how the firm should be run due to different perception and analyses view (Hoogervorst, 2014, p29). The auditors engage in frauds by failing to raise the alarm, despite clear rules and guidelines. The auditor is protected by their work ethics and terms of employment, which states that an auditor is not a bloodhound and neither a watchdog. The managers have the responsibility of detecting the risk of fraud and controlling them (Hoogervorst, 2014, p25). These give the management a chance to misappropriate the resources. Therefore, changes in the framework should include examining the preparation of auditor report.
Auditing is regulatory framework fails to accommodate public interest as its independence can be compromised. Independence is important to ensure the Auditors give a fair true view of the accounts. In contrast, lack of independence provides false information to the consumers and investors (Morgan, 2014, p.55). To ensure independence is maintained, IFRS should introduce regular mandatory of rotation of the Auditor unlike the current system where the Auditor is removed from office by reason such as incompetence. Moreover, technology in accounting should be embraced since they have proven scientific measures. The Auditors should use it to improve accountability and transparency.
- Regulators should seal the gaps that enables tax evasion and avoidance by the corporation. Tax avoidance and evasion stagnates the living standards (Preinreich, 2009, p55). Moreover, tax evasion and avoidance results to corporate governance issue such as corruption.
- The policy makers should strengthen the current policy requirement on fair value accounting and its extension to the financial instruments (Wolk, 2011, p46.). They should ensure that the firms make mandatory disclosures, as well as, encouraging them to voluntarily make disclosures of their unrealized fair value losses and gains.
- The regulators should ensure that the developed policy encourages the boards to reach out to the shareholders of the company for their input in decision-making. They should ensure that corporation conduct meetings to discuss the issues in the company with the shareholders. Improved shareholder communication and engagement in the affairs of the company is critical.
- The regulator should ensure that they provide guidance revolving around principles rather than setoff rules that are developed, but can be sidestepped. The total ban on non-audit services to audit client are insufficient to ensure independence of an auditor.
The issues of corporate governance such as corruption, risk management, shareholders participation, and mergers and acquisition should be reviewed. The financial market is affected by tax avoidance and evasion; hence, the regulator should ensure that appropriate policy is developed. Financial reporting and accounting standards were based on vague conventions and principles; hence, need for new policies. The independence of auditor is an issue that the policy makers should focus on to ensure that the lapses are sealed. Moreover, regulators should ensure that the outdated principles such as prudence, Fairview, historical cost, matching, and conservatism are reviewed to enhance their effectiveness. The auditors and accountants to have exploited the loopholes in these principles and provide false reporting on the financial position of a firm. The prevalence of fraud in firms affects the business performance and the financial market. Clear rules should be enacted to ensure that the auditors become part of financial regulatory entity; inherently, they should act as a watchdog.
Harris, P., 2007. Accounting and Financial Management. Boston: Pearson Bookds.
Hines, R. D., (2014). Financial Accounting: In Communicating Reality, We Construct Reality. Accounting. Organizations and Society, Vol. 13, No. 3, pp. 251-261.
Hoogervorst, H., (2013). Building Trust in Financial Markets: Accounting And Moral Hazard, Sydney: Ken Spencer Memorial.
Ketz, E., 2006. Accounting Ethics: Theories of accounting ethics and their dissemination. New York: Taylor & Francis.
Keeton, T., 2006. Ethics for today, 4th ed.. New York: American Book-Stratford Press.
Lahey, W., 2012. Self-Regulation and Unification Discussions in Canada’s Accounting Profession. Oxford: Dalhousie University.
Mayhew, B., 2003. Do Non-audit Services Compromise Auditor Independence? Further Evidence. The Accounting Review, 70(3), pp. 611-639.
McGregor, W., 2014. IFRS Conceptual Framework: The cornerstone of high quality financial reporting. Western Sussex: John Wiley & Sons Ltd.
Morgan, G., 2014. The New Accounting Research: Making Accounting More Visible. Accounting, Auditing, and Accountability Journal, pp. 3-36.
Mirza, A. A., 2010. Wiley IFRS: Practical Implementation Guide and Workbook. New York: Wiley & Sons.
Needles, B., 2013. Principles of Financial Accounting. London: Cengage Learning.
Opperman, 2006. Accounting Standards. London: Juta and Company Ltd.
Pratt, J., 2013. Financial Accounting in an Economic Context. New York: McGraw-Hill.
Rodriguez, M., 2013. Accounting for Infrastructure Regulation: An Introduction. Washington: World Bank Publications.
Parker, R., 2012. Towards a Theory and Practice of Cash Flow Accounting. London: SAGE Publishers.
Preinreich, G., 20009. A Landmark in Accounting Theory. New York: Taylor & Francis.
Staubus, G., 2012. The Decision Usefulness Theory of Accounting: A Limited History. London: Routledge.
Wahlen, J., 2010. Financial Reporting, Financial Statement Analysis and Valuation. London: Cengage Learning.
Wolk, H., (2011). Accounting Theory: Conceptual Issues in a Political and Economic Environment. New York: SAGE Publications.