In your response highlight ethics & governance, accountant’s role in changing depreciation methods, stakeholders and the impact of AASB116? Students must provide 8 academic references to support their response
The present report revolves around the ethical dilemma faced by the accountant of Sunshine Ltd. relating to changing the method followed for depreciation on an asset without any valid reasoning. The method which is selected for depreciation affects profit in the income statement as well as assets in the balance sheet. In the method, fo straight line depreciation same amount of depreciation is charged every year throughout the useful life of the asset. In the present case, the accountant has decided to change from straight line method to sum of years digit method. The management requested to find out a way so that the impact of lower profits in future years which is being expected by the economist does not affect the profit of the company. Therefore, the same procedure is decided by the accountant as it will provide consistent profits over next year and make shareholders satisfied with the result of the company.
Accountant’s Role in changing depreciation method
In the present scenario, straight line method of depreciation has been followed by Sunshine Ltd. since the company was established. Presently, the economic slowdown is predicted in the year 2018, and 2019 by the economist and the same will lower down the profits of the organisation also. The general manager Kam has approached Maria regarding this issue and asked her to find a way for reducing profit in next couple of years because presently the company is higher profit. It is needed so that consistent profit can be made available to the shareholders and that will make them more satisfied. Further, Maria has decided that to change the method of depreciation to the sum of year digit method for giving same effects. Even though she is not satisfied behind the reason but as she is afraid that not proceeding with same can affect her contract with the company. She also did not disclose the reason for the change in notes to account, as the same would not provide a good impression.
Ethics and governance are the main components of knowledge and skill for present professional accountants. An accountant can be said as key business decision makers thus they must be efficient in regulatory regimes, governance mechanism and compliance requirement for assuring corporate behaviour and operations (Bhasin, 2015). The ethics which are to be followed by an accountant are a part of human ethics as well as business ethics. As a variety of range of services is provided by accountants; importance of the ethical standard have increased in the accounting profession.
The nature of work carried by accountants needs a high level of ethics. The reason behind same is those shareholders, and other users of financial statements rely heavily on the financial statements of the company as they use the same information for the purpose of taking investment decisions. Knowledge of ethics assist accountant in overcoming ethical dilemmas, for accepting the right choice even though the same might not be beneficial for him as well as a company; but the same will be beneficial for the public who relies on the information made available by him (ArAs, 2016). In the present case, the accountant is playing a majorly responsible for changing the method of depreciation; as he is majorly responsible for it. The decision taken by her is not correct because changing the method of depreciation so that consistent profit can be presented to shareholders is non-ethical (Brown, 2014). Accordingly, the same might conclude in distrust by the public and commotion of capital market operation. In present case rather than discussing the issue with management, she decided to change the depreciation methods so that objective of general manager could be accomplished. The reason behind the change of policy is not disclosed in notes to accounts which mean that this important information is not provided to users of financial statements as it will not put a good impression.
Role of Stakeholders
Stakeholders are the individuals or group interested in the performance of the company, as they are directly affected by business decisions and their financial position. Investors, employees and customers are the main stakeholders. They have authority for providing suggestion relating to improving the reliability and relevance of financial information or reducing the cost of financial reporting. In case a voluntary change is considered in accounting principle than it is to be assured that the benefit overweighs the cost (Chang, Jackson and Wee, 2017). It is necessary that before making a change in any accounting policy, the same should be appraised by the company’s current auditor so that an appropriate opinion can be received regarding the change that new principles are preferable in comparison to old one. In present case management has enforcing the accountant to suggest such method so that the higher profits of the present, as well as next year, get reduced to getting them in correspondence with next future years.
Ethical responsibilities of stakeholders
It is believed that corporate and stakeholders’ responsibility makes business ethics a two-way conversation. However, it is important that stakeholders take responsibilities in both success and failure of the company in an appropriate manner and provide true facts to its investor. Stakeholders are responsible for creating the fabric of relationship between stakeholders and the organisation through their actions (Laing and Perrin, 2014). They are responsible for adopting fair policies, so that true and correct view of the organisation is presented through financial statements. They require assessing more critically and comprehensively regarding disaster in business ethics present in their organisation as they have the whole power. In accordance with the accounting provisions, change in accounting policy should be made if one of the following conditions is satisfied:
- Change in accounting policy results in better presentation of financial statements
- Change in accounting policy is described by law
- Change in accounting policy is due to change in applicable accounting standards
However, in the present case scenario, none of the conditions is satisfied as the purpose of the change in policy is window dress to maintain stable financial position so that shareholders remains satisfied with the performance of business. The reason for change in accounting policy is completely unethical (Rinaldi, Unerman and Tilt, 2014). Further, acceptance of approach by the accountant is another unethical aspect as she is accepting the point of manager only because of fact denial that led to issues in the renewal of the contract. At this point in time, she was required to provide a better recommendation, so they cope up with the issue without taking the support of any unethical accounting approach.
The objective of this standard is to provide accounting treatment for property, plant and equipment so that the users of financial statements will be in a position to access the information relating to an asset of the organisation in which they have invested and details relating to depreciation charges and impairment losses recognised by them (Tan?Kantor, Abbott and Jubb, 2017). In accordance with AASB 116 depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. When depreciation rate or methods are changing, the same must be in accordance with AASB 108 “Accounting policies, change in accounting estimates and errors”. The effect of same is necessary to be disclosed in notes to accounts. In case the effect of a change in method is on more than one accounting period than the same is also to be reported in financial statements (Abbas and Klemm, 2013). Depreciation which has been already recognised must not be changed or adjusted with retained surplus or any other adjustments.
Changes in accounting policy can be done only in specified cases:
- Change is required by Australian accounting standard.
- The change results in a financial report to be presented in more reliable and relevant information relating to the affected transaction and present more appropriate financial position of the organisation (Tsamis and Liapis, 2014).
Thus it can be concluded that change in policy requires consideration of qualitative characteristics such as relevance and reliability. The relation between relevance and reliability in asset valuation is the main consideration by accounting theory (A. Omran and M. El-Galfy, 2014). AASB 116 requires that depreciation should be allocated on a systematic basis over its useful life and the residual value should be reduced from the cost (Walsh, 2014). In the present case, the accountant has not complied with AASB 116 and AASB 108. Thus, the financial report of Sunshine Ltd. does not present true and fair view as it has not complied with Australian accounting standards.
Conclusion & Recommendations
In accordance with the present study, it can be concluded that taking the support of an unethical approach to resolving business issues is not a viable solution. It is because these aspects can only provide temporary solutions and can create severe threats in future for goodwill and market reputation of business. The present study shows the evaluation of unethical accounting approach adopted by manage in order to a stable position of business. However, the purpose of the change in accounting policy is in contradiction with the provisions of AASB 116. Thus, the disclosure of the accounting policy will not be viable, and same should not be implemented by the business.
Instead of making changes in accounting policies, management of the company should provide disclosure in annual report decreasing profits is due to unfavourable economic conditions not due to reducing the efficiency of the business. With this approach company will be able to show accurate business position and justify the same with industry standards. In addition to this, they can make improvement in production activities by employing new technologies to enhance sales in order to compensate adverse impact of changing economic conditions (West, 2016). In addition to this, they can make use of provisions and reserves to record losses by distributing in future accounting years instead of recording entire loss in single accounting year.
Books and Journal
Omran, M. and M. El-Galfy, A., 2014. Theoretical perspectives on corporate disclosure: a critical evaluation and literature survey. Asian Review of Accounting, 22(3),Pp.257-286.
Abbas, S.A. and Klemm, A., 2013. A partial race to the bottom: corporate tax developments in emerging and developing economies. International Tax and Public Finance, 20(4), Pp.596-617.
ArAs, G., 2016. A handbook of corporate governance and social responsibility. CRC Press.
Bhasin, M.L., 2015. Corporate Governance and Forensic Accountants' Role: Global Regulatory Action Scenario.
Brown, K.M., 2014. Integrating Ethics into Financial Management Courses: A Role-Play Approach. Accounting Education for the 21st Century: The Global Challenges, P.370.
Chang, M., Jackson, A.B. and Wee, M., 2017. A review of research on regulation changes in the Asia?Pacific region. Accounting & Finance.
Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB 116 non-current asset measurement models. International Journal of Critical Accounting, 6(5-6), Pp.509-519.
Rinaldi, L., Unerman, J. and Tilt, C., 2014. The role of stakeholder engagement and dialogue within the sustainability accounting and reporting process. Sustainability accounting and accountability. Pp.86-107.
Tan?Kantor, A., Abbott, M. and Jubb, C., 2017. Accounting Choice and Theory in Crisis: The Case of the Victorian Desalination Plant. Australian Accounting Review.
Tsamis, A. and Liapis, K., 2014. Fair Value and Cost Accounting, Depreciation Methods, Recognition and Measurement of Fixed Assets. International Journal of Economics & Business Administration (IJEBA), 2(3), Pp.115-133.
Walsh, J., 2014. The Role of Ethics in a Future Accounting Career.
West, A., 2016. The ethics of professional accountants: An Aristotelian perspective. Accounting, Auditing and Accountability Journal.