1. Accounting Issues
This report emphasizes on the discussion of the news article named Concerns raised about ‘too big to fail’ KPMG as it facilitates in the evaluation of the issues faced by KPMG in relation to accounting practices. Besides this, it also provides the information related to different theories and concepts related to accounting and relate it to the issues faced by the company.
Name of the Article Chosen: “Concerns raised about ‘too big to fail’ KPMG”
Author: Madison Marriage, Caroline Binham and Martin Arnold (Published on: 20th July 2018)
Name of the Magazine: Financial Times
Source of the article: https://www.ft.com/content/f660b6a2-8b75-11e8-bf9e-8771d5404543
Discussion on the Article
It is identified that there are several companies such as Arthur Anderson that has collapsed due to the existence of the accounting scandal by Enron in the year 2002 due to which the company has written off various audit professions. It is also found out that there are various big accounting firms that could fail in a catastrophic manner due to the impact of Arthur Andersen demise. It is also found out that there is a decline in the profits of the KPMG before tax to fifth in the year 2017 to £301 million. The company has put aside £ 56 million for the purpose of meeting out the potential fines and legal costs. It is also estimated that KPMG will overcome its recent difficulties as it is in favor of the interests of regulators and competitors such as PwC, Deloitte and EY. KPMG is involved in several big scandals across three continents in spite of this, its biggest international clients are not distancing from the firm (Marriage, Binham & Arnold, 2018).
The different scandals in which there is an involvement of KPMG such as collapse of Carillion and from the investigation it is found out that the three partners of the KPMG are accused of leaking confidential information in improving inspection of the results for the firm. Despite of the involvement in different accounting scandal, the company is able to attain the contract of audit for the mining company such as Rio Tinto. The financial health of KPMG is strong and have gained growth across advisory, audit and tax. KPMG has failed in spotting the signs of financial instability which led to financial crisis due to which the regulators have increased its scrutiny (Marriage, Binham & Arnold, 2018).
It is identified that the commission has reported that the auditors have failed to expose the risks related to the banks in their financial statements in the year 2013 during the crisis. The audit done by KPMG has failed to inform the users about the financial condition of the banks in an accurate manner. The commission has criticized as the quality of the audits in an effective manner. There is a presence of various fears regarding the shape of the audit market despite of the various attempts by different international authorities to lose the grip on the market such as introduction of mandatory audit or rotation across Europe caps on the amount of consulting work auditors (Marriage, Binham & Arnold, 2018).
The CMA is required to investigate the cases of audit firms in order to reduce the competition and overcome the conflicts of interest in the sector. The collapse of the KPMG would results in leaving of the three big audit firms in the market which has a significant influence on the level of competition existed in the market. In order to resolve the issues there is a requirement of the intervention in the market by the government to prevent the disruption of the collapse of the firm. It is suggested that KPMG should spin off the non audit work by creating a separate firm. KPMG Audit should only focus on audit and should invest more in the company to ensure effective implementation of the audit operations (Marriage, Binham & Arnold, 2018).
Discussion of the Theory and its Application on KPMG
It is essential for the firms to comply with the standards and principles of accounting while recording the financial transactions in the form of different financial statements in order to communicate accurate information related to the financial performance and position of the company to the users. The main reason behind the compliance with the standards and principles of accounting facilitates in bringing consistency and uniformity in the presentation of the information in different financial statements which in turn provides the benefits to the users to compare the information with other players in the market in order to make financial decisions. This also helps in elimination of the occurrence of the conflicts among the different stakeholders of the company (Moran Reynolds & Gannon, 2018).
Apart from this, nowadays, there is a establishment of the regulatory authority that intervenes in the activities of the company in order to protect the interests of the stakeholders. The companies nowadays appoint external auditors to oversee the financial statements of the company before communicating it to the end users as it facilitates in presenting the accurate information to the end users, but now the auditing is transformed into a separate profession and there is an existence of big companies or auditing firms that carries out audit function and are involved in various accounting scandals (Duska, Duska & Kury, 2018).
In case of KPMG, it is required by the company to adopt ethical practices and check or monitor the financial results of the company in accordance with the set accounting standards and accounting principles in order to bring transparency in the operations carried out by the firms. It is essential for the regulatory authorities to impose penalties of large amount on the auditing firms if they adopt fraudulent activities while carrying out the audit function due to misrepresentation of the information in the financial statements of the company. The main reason behind it is that it results in the creation of the conflict between the interests of different stakeholders (Duska, Duska & Kury, 2018).
It is essential for the audit company i.e. KPMG to gain information related to different operations and activities being performed by the company in order to provide true insights related to the financial strength and position of the company and protect the interest of the stakeholders in a significant manner. It is also identified that KPMG is able to measure the loss in the quantitative or monetary terms incurred by it in the form of provisions set by them to meet out the penalties and charges levied. Although it is also identified that the companies that have faced accounting scandal has complied with the accounting standards developed by IASB but has made modifications in them in order to attain the desired results in order to fulfill their goal of profit maximization in order to attract more number of stakeholders (Leitoniene, Sapkauskiene & Dagiliene, 2015).
The audit company is able to measure the performance of the company in accounting and quantitative terms which helps in provision of the adoption of the actions that can be applied in a real manner. It is required by the audit company to expose the risks faced by the banks through their financial statements which help in reducing the occurrence of bankruptcy of the financial institutions and banks on a large scale. It is required by the government to establish a regulatory authority that monitors the performance of the audit firms in order to prevent the situation of the occurrence of the accounting scandal in the economy as a whole (Kuznetsova, Bogataya, Khakhonova & Katerinin, 2017).
It can be concluded that despite of the fact that KPMG is involved in various accounting scandals, the companies at the international level appoints it to audit their financial statements and accounts in order to provide accurate information to their users. Along with this, it is identified that the accounting issues due to which the scandals have happened is due to the non compliance of different accounting theories in an effective manner.
2. Accounting Standard Update
The Proposed Accounting Standards Update: Collaborative Arrangements (Topic 808): Targeted Improvements
Issued: 26th April 2018
Comments due: 11th June 2018
The accounting standard authority named Financial Accounting Standards Board (FASB) has released the exposure draft related to the proposal before the implementation of the Accounting Standard in Australia. The main reason behind the release of the exposure draft related to the proposed amendments in the accounting standard is to seek comments from the public on the proposal. FASB has released the exposure draft to make proposed amendments related to targeted improvements in Topic 808 i.e. Collaborative Arrangements. As per Topic 808, collaborative arrangements refers to contractual arrangement in which two or more parties to actively participate in a joint operating activity exposed to significant risks and rewards depending on the commercial success of the activity (FASB, 2018).
The main reason behind the issuance of the proposed accounting standard update is that Topic 808 does not include the comprehensive recognition or measurement for collaborative arrangements and its accounting is based on accounting policy election and analogy to other accounting literature. It is also found out that there is an occurrence of the differences in the application of the method to recognize their arrangements that results in diversity in practice adopted to account the transactions from the perspective of the economics of the collaborative arrangement (FASB, 2018).
This accounting update affects those entities that are involved in collaborative arrangements. This amendments in proposed update helps in making targeted improvements in generally accepted accounting principles for collaborative arrangements. There is a requirement of addition of account guidance in this accounting standard in order to align it with Topic 606. In case the participant in the collaborative arrangements is customer then there is a need of gaining clarification of the transactions among collaborative participants to account for revenue under Topic 606 (FASB, 2018).
In such situations the guidance in Topic 606 is applied that includes measurement, recognition, disclosure and presentation requirements. It is also required for the companies to present the transaction not as revenue if the transaction is not directly related to sales to third parties and the counterparty participant in collaborative arrangements is not a customer. The main provisions differ from current generally accepted accounting principles as it provides the guidance related to whether some of the transactions carried out between the collaborative participants are accounted for revenue aligned with the guidance in Topic 606 (FASB, 2018).
These amendments facilitates in provision of effective comparability in the categorization as revenue between collaborative participants. It is also identified that prior to the issuance of Topic 606 the revenue from collaborative arrangements have been included by stakeholders as the revenue recognized as per Topic 605 i.e. revenue recognition, recognized through analogy to the guidance in Topic 605 and revenue recognized through the application of a policy election. The amendments proposed related to collaborative arrangements reflect that it helps in the improvement in comparability as these amendments has permitted that the revenue will be recognized only in the case of those transactions where collaborative arrangements are indirectly related to sale to third parties in accordance to Topic 606. There is no change have been made in the requirements for those transactions that are directly related to sales to third parties (FASB, 2018).
It is also found out that FASB also invites organizations and individuals to provide their views and opinions and comment on the matters included in the proposed update on the issues and questions related to the amendments made. The comments are requested in the form of provision of support and against towards the proposed guidance which is helpful for identification and explanation of the issue or question to which they relate. Besides this, those people or organisation that disagrees with the amendments is allowed to provide suggestion with suitable justification in an effective manner (FASB, 2018).
Opinions and Comments of Other industry Players on the Changes
Comments of four market players are discussed below on the proposed changes. The names of these organizations are
Source of comment from Pfizer:
Source of comment from Johnson & Johnson:
Source of comment from Ernst & Young:
Source of comment from Deloitte:
Discussion and Analysis of Comments
As per Johnson & Johnson, the company has not a right to the profit split payment until the calculation of the final terms in the contract is done by collaborator. Earlier, the company deferred the profit split payment from the collaborators until there is an occurrence of the sale to the third party by the collaborator. The company wants a clarity regarding the continual implementation of the historical policy by the company in relation to recognition, measurement and presentation of the transaction by analogizing to the relevant elements of Topic 606 (Kapusta & Rivera, 2018). It is suggested by the company that the profit split payment should be allowed to reported as part of total revenue in case of the attainment from a collaborator if it is based on sales generated from third parties. Along with this, the companies should be allowed to make a policy election for recognizing the profit split payment as and when products are sold to third parties. Apart from this, Johnson &Johnson also suggested that the adoption of unit of accounting by the companies for the determination of the recognition and measurement of the upfront payment as a component or element of the accounting policy election then it is appropriate to allocate it over the development period. At the time of development phase of collaboration, there is a need of work in collaboration for the development of the intellectual property for gaining success (Kapusta & Rivera, 2018). The company believe that implicit obligation between the partners to work together during the development phase which results in the attainmenrt of the commercial success to both the parties.
In a similar manner, Pfizer believe that the proposed accounting standard update helps in reducing the diversity in practice in a significant manner as it allows the companies to analogize to the authorized literature in spite of ASC 606 and apply the accounting policy for those transactions in which the counterparty is not customer. The company also believes that the matters included in the proposed ASU are consistent with their present accounting policies in relation to collaborative arrangements. Along with this, the company also supports the reluctance of the FASB to create one size fits all non revenue model for collaborative arrangements as there is a presence of less flexibility to allow the application of the accounting update to various facts and circumstances in different arrangements. It is essential for the FASB to include proposed updates to ASC 808-10–45-3 excludes transactions related to sales to third parties like sale of production inputs, and profit share receivables (Cangialosi, 2018).
Along with this, Ernst &Young agreed to the amendment made by FASB towards the update related to collaborative arrangements. It is also found out that the company believes that there could be more than one transaction in the scope of ASC 606 with respect to the scope of ASC 808 collaborative arrangements. There are certain areas which requires clarification in relation to this for the attainment of the objective of FASB. Apart from this, the scope guidance in ASC 808 believes that there is a requirement of removal of doubt regarding counterparty in a collaborative arrangement can be a customer for one or more transactions. It is required by the entities to be judgmental for the implementation of the proposed amendments to reach to a conclusion regarding the counterparty is a customer in different similar situations (Ernst & Young, 2018).
Apart from this, Deloitte has a view that FASB is required to provide clarification in ASC 808-10-15-5A that activities between collaborative participants are directly related to third party sales are not under the scope of the project in a explicit manner. Along with this, FASB has the intention to exclude the activities carried out by the collaborative participants which are related to third party sales in paragraph B-12 and B-20. It also supports that the proposed update will be helpful in reducing the diversity in the practice. The company also believes that there is no requirement of the additional guidance for the determination of the collaborative participant is a customer or not in context of collaborative arrangement. There is no provision of the definition of the term component in ASC 808 with reference to ASC 606. FASB has provided the definition of the component in the proposed update in the paragraph BC15 in an implicit manner (Deloitte, 2018).
Cangialosi, L.V. (2018). Pfizer Comment Letter. Retrieved from: https://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175835890909&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=650813&blobheadervalue1=filename%3DCOLLAB.ED.002.PFIZER_INC._LORETTA_V._CANGIALOSI.pdf&blobcol=urldata&blobtable=MungoBlobs
Deloitte. (2018). Comment Letter. Retrieved from: https://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175835892213&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=599055&blobheadervalue1=filename%3DCOLLAB.ED.013.DELOITTE_TOUCHE_LLP.pdf&blobcol=urldata&blobtable=MungoBlobs
Duska, R. F., Duska, B. S. & Kury, K. W. (2018). Accounting ethics. USA: Wiley-Blackwell.
Ernst & Young. (2018). Comment Letter. Retrieved from: https://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175835898533&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=636336&blobheadervalue1=filename%3DCOLLAB.ED.017.ERNST_YOUNG_LLP.pdf&blobcol=urldata&blobtable=MungoBlobs
FASB. (2018). Exposure Draft. Retrieved from: https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176170411165&acceptedDisclaimer=true
Kapusta, R.A. & Rivera, S. (2018). Johnson & Johnson Comment Letter. Retrieved from: https://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175835891867&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=754324&blobheadervalue1=filename%3DCOLLAB.ED.005.JOHNSON_JOHNSON_RONALD_A._KAPUSTA_STEPHEN_RIVERA.pdf&blobcol=urldata&blobtable=MungoBlobs
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Marriage, M., Binham, C. & Arnold, M. (2018). Concerns raised about ‘too big to fail’ KPMG. Retrieved from: https://www.ft.com/content/f660b6a2-8b75-11e8-bf9e-8771d5404543
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