Accounting scandals, ethical dilemmas, and educational challenges
Transparency and disclosure are critical elements of a robust corporate governance structure. They provide the foundation for sophisticated decision making by stakeholders, shareholders, and potential investors in correspondence to the allocation of capital, evaluation of the financial performance and corporate transactions. Both market regulators and academics have extensively recognized the essence of transparency. This discovery has led to the introduction of various rules and regulations to ensure financial information disclosure in time and efficiently, thereby creating standards to which organizations must adhere. In recent decades, corporate transparency has been among the issues of concern in evaluating factors that have contributed to the recurrent scandals that have led to corporate collapses. This paper will address the ways through which the aspect of corporate transparency has led to the company’s failure.
Low et al. (2010) argues that on any occasion, accounting scandal or corporate fraud occurs, a dominant feature reported is inconsistency in financial reports. This inconsistency leads to uncertainty and a lack of confidence in the corporation, thereby minimizing the decision usability of such reports. For instance, it has been prompted that continuous exposure of accounting scandals associated with America’s exemplary corporations have watered down investor confidence and the society’s perception of companies and the accounting profession (Low et al., 2010). Besides, this paper points out that the operation of financial markets, as well as economic activities, rely on the ability of the accounting profession to reinforce trust in the financial reporting system.
Considerable numbers of the companies in the extractive industries are economically essential, high profile, and mainly operate globally ( Cortese et al. 2010, p 77). Due to the growth of this industry’s essence, IASC raised concerns on the importance of an accounting standard to facilitate the processing of comparable and reliable financial information for the investors and other users. In a reaction to this demand, IASC added a list to its plan for this industry, intending to address the industry’s disclosure and measurement issues. Among the issues of concern was the treatment and disclosure of pre-production or evaluation costs, which can run up to hundreds of dollars. Over time, the successful efforts method as well as the full cost method have been developed to help in accounting for pre-production costs. The implications of the full cost method as well as the successful efforts method on the reported profits are considerable. For instance, using the full cost method, UKs Premier Oil in 2014 posted a $44 million profit and $22 million when using the successful method ( Cortese et al. 2010, p 77). The critical variation between these methods is the sum of evaluation cost that is capitalized under each method. For instance, when using the successful efforts method, evaluation costs can only stand capitalized if only they are related to the successful mineral discovery and development. In the evaluation stage, each and every costs may be capitalized, but if a project turns out to be worthless, these costs must be canceled (Cortese et al. 2010, p 78). In case a project succeeds, amortization of the capitalized costs against the project’s revenue takes place.
Although this method is consistent with accounting standards, the exploration activities’ intrinsic uncertainty implies that the revenue streams, as well as the asset balances reporting under the successful efforts method, can vary notably (Cortese et al. 2010, p 78). Although this may not present a considerable issue for large entities due to their ability to absorb losses from failed ventures, it can be a considerable issue for smaller entities, thereby forcing them to avoid using successful efforts accounting.
Given that attempts to standardize accounting methods were ineffectual in the 1970s and that the IASB has also failed in implementing uniformity, accounting is faced with issues related to profit and performance evaluation in this industry. Besides, companies in this industry can select a method that best suits their corporate desires in disclosing financial information.
Islam and Deegan (2010) argue that most of the multinational companies often use reports such as the sustainability reports to address their deliberate intentions rather than report on their companies’ performance. For example, in relation to the media agenda-setting theory and legitimacy theory in the cases where the worldwide news media agenda have impacts on global societal concerns for a given issue, companies react in a certain way. For example, it is expected that the scope and type of the corporate social disclosure, at the end of year report of an international company, will be correlated directly to the pivot and scope of the media attention. Therefore, the disclosure reaction will pay attention to the media (Islam and Deegan, 2010).
From the three articles’ assessment, it is evident that corporate transparency is mainly dependent on the accounting process in an organization. For a company to minimize the chances of collapsing, the corporal governance should let the accountants operate independently to ensure transparency in accounting and financial reporting and thereby regain public confidence. By retrieving the public trust, investors will feel be compelled to invest in these corporations and therefore guarantee continuity.
References
Cortese, C., Irvine, H., and Kaidonis, M. (2010). Powerful players: How constituents captured the setting of IFRS 6, an accounting standard for the extractive industries. Accounting Forum. 34:2, 76-88,
Islam, M., and Deegan, C. (2010). Media pressures and corporate disclosure of social
responsibility performance information: a study of two global clothing and sports retail
companies. Accounting and business research, 40(2), 131-148.
Low, M., Davey, H., & Hooper, K. (2008). Accounting scandals, ethical dilemmas, and
educational challenges. Critical perspectives on Accounting, 19(2), 222-254.