Friday, December 6, 2019
Accounting Theory Management
Questions: Jimmy is the chief accountant at clothing retailer King Ltd and has been in this role for around 10 years. King has a June 30 year end and Jimmy is finalising the year end accounts. In finalising the inventory valuation Jimmy has a discussion with the warehouse manager. Jimmy is informed of the existence of a large amount of slow-moving stock. A closer inspection of the stock reveals that it is ten months old and would normally have been written down several months earlier if normal procedure had been followed. Jimmy decides to follow up the issue of the stock valuation with the managing director Peter Gladstone. It is well known within the company that Peter is also a key shareholder of King. Jimmy is suspicious that Peter may have given a directive to maintain inventory values. Peter informs Jimmy that there is no need to write down the stock in the year end accounts. Jimmy suspects, however, that Peter wants the balance sheet to carry inflated stock values because he wants to sell King on terms advantageous to the shareholders. Peter goes on to tell Jimmy that he is aware of a potential buyer who is looking to inject capital into the business and that if the sale proceeds then all employees will hold onto their jobs and that Jimmy will receive a substantial pay increase. Required: a) Define the normative ethical perspectives of teleology and deontology. b) From an ethical egoist perspective, what would be an appropriate course of action for Jimmy? Justify your choice. c) Would your answer to b) be different if Jimmy pursued utilitarianism? Justify your position. d) Advise Jimmy of an appropriate course of action from a deontological ethical perspective. Outline why it is based on deontological ethics. Answers: Overview The selected news article, i.e. https://www.abc.net.au/news/2016-02-03/nsw-accountant-facing-fraud-charges/7137160 (Refer to Appendix) focuses largely on the fraud charges that were posed against an accountant named Nicholas James Ellis of Lake Macquarie in New South Wales. The Australian Securities and Investments Commission (ASIC) charged 44 years old Nicholas James Ellis, with an allegation of misappropriating thousands of dollars. It was also evident through investigation that he had committed such offences of fraudulence even in the past and that too around 23 times, for which he had to appear before the Downing Centre Local Court. Majority of those cases related to the misleading statements, which he had made regarding his previous investments (Wakatama, 2016). ASIC made the allegations against Ellis as mentioned in this news article was that he was involved in a fraud of misappropriating approximately $857,000from the funds of the inventor during the tenure of his directorship from March 2009 to June 2010. It was also been investigated that he had utilized the money for his personal benefits such as purchasing a home of $3 million. He had also laundered $250,000in paying off to the investors of his previous failed investment, which he used to run personally. All these charges individually can penalize him for a minimum of 5 years up to a maximum level of 10 years of imprisonment. Moreover, in the year 2013, he was also been prohibited from offering financial services for 6 years (Wakatama, 2016). Major Accounting Issues The ethical issue of financial accounting is the foremost decisive aspect notable in this particular case relating to Ellis. The section of ethical concern that is evident in the case of Ellis is the Misappropriation of Assets, which means the accountant (i.e. Ellis) has been using the assets of the company for his own benefits. In ethical concepts, it can also be stated as an embezzlement of the companys funds/assets for personal benefits that largely affects the stakeholders (Freedman, 2016). Another very significant issue that can be found in the case as presented in the news article is the making of misleading and false statements, which is considered a part of the integrity related issue of accounting laws. According to this issue, the professional accountants associated with the corporate sectors need to be well aware of the integrity of their position and the manner they need to present their dealings in the real world. The foremost aspect that the accountant needs to understa nd is the terms of integrity, which involve the need to be truthful, honest and straightforward in managing their professional relationships. They also need to maintain honesty in making statements regarding the financial issues, so that the reports as well as the other financial documents are presented to the stakeholders of the respective company with utmost accuracy. Lack in professionalism is also a very important issue that can be inferred from the case of Ellis as provided in the news article (IFAC, 2006). Accounting Theories Accounting theories refer to the logical interpretations as well as justifications with the support of various principles, which are not only for the evaluation and for supervision of the accounting practices, but also for its development and innovation in the long run. The principles, customs and procedures on which the accounting theories are implemented are actually the Generally Accepted Accounting Principles (GAAP), which has its respective justifiable reasoning. The accounting theories can be categorised under various heads namely, Descriptive Theory, Deductive Accounting Theory, Evaluative Accounting Theory and Generally Accepted Theories among the most important ones (Riahi-Belkaoui, 2004). The theory that relates with the offences of Ellis as presented in the news article can be evaluated with the help of the Inductive Accounting Theory, as it mostly highlights the previously occurred events within an organisation with respect to the accounting perspectives. In the case prov ided, it can be found that Ellis is charged for the ethical offences, which he committed in the past for which he is liable to be penalised (Wakatama, 2016). Application of the Accounting Issue and Theories with the Case The Misappropriation of Assets is a very significant ethical issue of accounting law, which is apparent from the case of Ellis as presented in the news article. As per the article, Ellis withdrawn money from the investors funds and used for his personal needs of buying a house and paying off his personal debts. In both the cases, Nicholas James Ellis had committed offence of Misappropriation of Assets for which he is liable for appropriate punishments as well as penalties for compensation. The violation of ethical laws of accounting has harsh penalties, as it tends to affect a large group of people financially (Freedman, 2016; Wakatama, 2016). Another offence that he committed was making misleading and false statements in the past regarding his previous investments. This offense is likely to have caused problems of inaccuracy in the organisational reports, which also asserts him to be liable for penalties as compensation. This is an issue related to his personal integrity as a profes sional accountant as well as that of the organisation as a whole. This also hampers professionalism as per the accounting laws, which is also a very serious issue as depicted in the news article of Ellis (Wakatama, 2016; IFAC, 2006). Summary From the overall discussion, therefore, it is apparent from the news article on Ellis that he, being a professional accountant had nor adhered to the ethical considerations of the accounting laws and was hence liable for financial penalties as well as punishments for around 23 cases in the past. Most importantly, he was charged by ASIC on the recent case of Misappropriation of Assets, which has been clearly explained in the above discussion with the help of relevant accounting theories as well as the major accounting issues. The logical interpretations and justifications of the issues with relation to the offences of Ellis also clearly depicts the proper understanding of the viability of the punishment as well penalty that he is charged with for his unethical offences in the field of accounting. References FASB. (2005). Proposed statement of financial accounting standards on business combinations file reference 1204-001. EMC, 1-2. FASB. (2005). FASB exposure draft, proposed statement of financial accounting standards, "business combinations, a replacement of FASB statement no. 141". File Reference: 1204-001, 1-5. FASB. (2005). R.K. Company. File Reference: 1204-001, 1. FASB. (2005). Pooling vs Aquisition accounting for merged cooperatives. File Reference 1204-00 J, 1. Freedman, J. (2016). What is an "ethical issue" in financial accounting? Retrieved June 01, 2016, Guerin, K. (2003). Encouraging quality regulation: theories and tools. New Zealand Treasury Working Paper, 1-20. IFAC. (2006). Code of ethics for professional accountants. Ethics, 1104-1213. Posner, R. A. (1974). Theories of economic regulation. Working Paper, 1-44. Riahi-Belkaoui, A. (2004). Accounting theory. Boston: Cengage Learning EMEA. Wakatama, G. (2016). NSW accountant facing fraud charges. Retrieved June 01, 2016, Williams, K. (2005). FASB, IASB publish joint proposals on business combinations. Streetwise, 19.