Current Issues in Accounting
Studies and research on corporate governance have investigated on issues such as corruption, bribery, growth and strategy, succession planning, IT governance, and financial regulatory framework is the focus of the regulators and policymakers. Harris (2007) says that corporate governance enhances accountability, transparency, and shareholders participation on boardroom decisions. Morgan (2014) argues that corporate governance helps in regulating mergers and acquisition, climate change and sustainability, proxy access, and executive compensation. Wahlen (2010) says that agency theory helps defining the problem created by corporate governance, which is the problems of directors controlling the firm when the shareholders are the owners. In the past, the theory was defined as the inability of directors to act on the best interest of the shareholders (Keeton, 2006, p15).
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 generate net cash flow over time; however, the security view is concern raised by security brokers whose activities is selling securities (Staubus, 2012, p31). Therefore, the policy makers should make sure that these issues feature in their reform plans.
Preinreich (2009) cites Microsoft Company when explaining issues of tax avoidance and evasion. Preinreich says that the company moved their IP right to Puerto Rico where tax is lower to avoid paying taxes. It is clear that they affect the ability of the country to offer services to the society and businesses. Regulators should seal the gaps that enable tax evasion and avoidance by the corporation. Tax avoidance and evasion stagnates the living standards (Harris, 2007, p44). Moreover, tax evasion and avoidance results to corporate governance issue such as corruption. Inherently, a robust set of rules and concepts should be developed to show the underlying economic situation (Wahlen, 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.
Hines (2014) posit that in the past, financial reporting and accounting standards were based on vague conventions and principles. Harris (2007) states principles such as prudence, fair view accounting, historical cost, matching, and conservatism as difficult to understand. Harris and Hines contend that loopholes for the auditors and accountants to proffer false reporting on the financial position of a firm. Wolk (2011) says that past principles based their decision on inconsistent, ad hoc, and unrelated policies. Therefore, reviewing the conceptual framework proffer 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. Parker (2012) adds that the policymakers should strengthen the current policy requirement on fair value accounting and its extension to the financial instruments. They should make sure that the firms make mandatory disclosures, as well as, encouraging them to voluntarily make disclosures of their unrealized fair value losses and gains.
While citing Lehman Brothers case, Opperman (2006) says that the public corporation should share information to the public, such the profit and loss accounts. This is critical since it will offer useful information for the users of the financial statement. Hines says that current framework enabled the company to engage in fraud as the sections that elaborate on the disclosures and presentations are weak. Therefore, policymakers and regulator should look into the existing problems of disclosure and presentation. Disclosure concepts should be based on higher levels of the framework. Arguably, the role of business models is pervasive in financial reporting; they have competing theories such as the 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 the problem in the current accounting policies and principles lies on the moral hazards of the financial markets. 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 performance of the firm. Lack of transparency and fraud is a scourge that is destroying the financial market. Ketz (2006) use examples of Adelphia, Bond Corp, and HIH Insurance Corporations to illustrate why audit fraud need urgent resolution. The current financial crisis provides insights to the risks unprecedented to market boom and financial institution. Therefore, reporting standards requires transparency, quality, and comparable information.
I believe that measurement of the elements needs changes to make certain that they are descriptive and not inspirational (Ketz, 2006, p406). The international and national institutions mandated with developing new rules and regulations should make sure that they name the measurement basis. This is critical since it will offer useful information for the users of the financial statement. This is a critical area they should be examine given the existing problems are facing while developing disclosure and presentation issues.
Needles (2013) defines agency problem as 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 who are the real owners. Hoogervorst (2014) says that existence of the agency problem in management of Enron Company is to blame for the mismanagement and the fraud case that characterized the company. Inherently, the problem arises when the agents do not agree with the shareholders on how the firm should be run due to different perception and analyzes view. Rodriguez (2013) says that auditors engage in frauds by failing to raise the alarm, despite clear rules and guidelines. To solve cases of fraud, the regulator should make sure that they offer guidance revolving around principles and not set off rules that are developed, but can be sidestepped. The total ban on non-audit services to the audit client is insufficient to guarantee the independence of an auditor.
Lahey (2003) says that auditing regulatory framework fails to accommodate public interest as its independence can be compromised. It is important to safeguard the auditors’ independence for them to give a fair true view of the accounts. In contrast, the lack of independence offers false information to the consumers and investors. Therefore, changes in the framework should include examining the preparation of auditor report. Keeton (2006) says that the regulator should make sure that the developed policy encourages the boards to reach out to the shareholders of the company for their advice in decision-making. They should make sure 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. Pratt (2014) recommends IFRS to introduce mandatory rotation of the Auditor, to safeguard the independence of auditors. Moreover, technology in accounting should be embraced since they are proven scientific measures. The Auditors should use it to improve accountability and transparency.
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 make sure that the proper policy is developed. Financial reporting and accounting standards were based on vague conventions and principles; hence, need for new policies. Independence of the auditor is an issue that the policy makers should focus on to seal the lapses. Moreover, regulators should check outdated principles such as prudence, fair view accounting, historical cost, matching, and to enhance their effectiveness. The auditors and accountants to have exploited the loopholes in these principles and offer false reporting on the financial position of a firm. Prevalence of fraud in firms affects the business performance and the financial market. Clear rules should be enacted to make sure that the auditors become part of the financial regulatory entity; inherently, they should act as a watchdog.
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