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Background Information

1. For this particular question, article is selected from “The Guardian” and the title is “Accounting watchdog to investigate KPMG over Rolls-Royce audit”. The article is published recently on 4th of May 2017. It is well understood that other articles are available that highlights theoretical issues that leads to prohibited practices of some audit business that have an undesirable effect on linked stakeholders of the specified business. The current article clearly explains how accounting watchdog had investigated audit firms (KPMG) while auditing for Rolls Royce (Zhang et al., 2016).

It is important to understand the fact that mainstream of business functioning in the global market that have intention to increase the levels of profits. It requires implementation of various company strategies that wins the confidence and trust of different stakeholders (Zeff, 2016). It is essential to win confidence and trust over the stakeholders that lead to enhancement of business operations in the international business enterprise. This will lead to increasing the growth rates as well as future cash flows at the same time. In this article, there was clear mention about the process of Financial Reporting Council for reviewing the deal of Rolls Royce with Serious Fraud Office that incurs £ 671 million for settling the allegations that leads to corruptive activities. The issue had reached the public where FRC (Accounting watchdog of UK) had properly takes initiatives for investigating into the KPMG audit with Rolls Royce (Ball, Grubnic & Birchall, 2014). It was needed for investigating the case as there is involvement of engineering group that sets for a bribery case with Serious Fraud Office for the year 2017.

On analysis, it is noted that Rolls Royce had made an agreement to incur £ 671 million for settling long-term allegations of corruptions that is well-defined at the time of deferred examination (Miller & Power, 2013). Due to Brexit effect, there was high cost of settlement as well as depreciation of pound value and this issues leads to yearly loss of more than 4.6 billion. The loss incurred was the highest one for this business organization. FRC had taken initiation to evaluate the KPMG audit in association with the financial statements for the company (Rolls Royce) for the year 2010 and 2013. It was stated by the owner of KPMG that regulators have to evaluate the issues that relates with public interest (Ball, Grubnic & Birchall, 2014). After looking at the demand of KPMG, it can be stated that the audit work of Rolls Royce need to carry out effectively with full care as well as due diligence that assures overall audit quality. It is important to understand the fact that an apology had been made by Rolls Royce where they had bribed the middlepersons for securing the orders in countries such as India, Indonesia, Nigeria as well as China and Thailand. For instance, the company had paid £28 million to the middlepersons in Thailand for getting access to few contracts (Meyer et al., 2013).  

The Role of Stakeholders in Business Operations

On evaluating the case, it is noted that Rolls Royce had bribed the SFO for settling the fraud charges (Dillard, 2014). This action leads to contravention of public interest where SFO concentrate mainly on defensive the events of business enterprise. Furthermore, the middlepersons of the various nations had undertaken bribes in order to secure contracts of the organization. Rolls Royce wanted that their competitors should not enter in the market and this was treated as unscrupulous measures. There is direct intervention of FRC who was responsible for investigating the market due to allegations and applied stringest regulations on the audit business for evaluating as well as disclosing the financial statements in an effective way (Klinglmair, Sala & Brandão, 2014).

The reputational theory explains the fact where the investors prefer in dealing with such business enterprise that has strong reputation in the market and aligns with the efficient growth financials. In addition, the cost-benefit analysis over long-term shows dishonest actions that does not take place that aligns with the organizational interests (Ball, Grubnic & Birchall, 2014). Some long-term actions take place where dishonest behavior is likely to occur for obtaining short-term benefits. As far as Rolls Royce is concerned, the business has made a corrupt practice with SFO for resolving its bribery compulsion. Furthermore, the main purpose was to maintain the faith levels with the shareholder for accumulating greater funds especially at the time of funding capital projects. From the annual report of Rolls Royce for the year 2010 to 2013, it is noted that the figures are misstated that enables the company for gathering sufficient funds from the investors to undertake new contracts (Deegan, 2016).

It is recommended to the company to carry out their operational progress in the short-run. It was due to this reason why the company incurs loss as there was loss in the confidence of the investors. Furthermore, the allegations imposes the company to be identical with reputational as well as public interest theories that explains the requirements for applying stringest regulations for given audit business enterprise (Deegan, 2013).

2. The main aim of the assignment is to assess the development application about Financial Accounting Standards Board that relates directly with employee payment share-based accounting as well as stock of compensation. In addition, there are main four respondents who are responsible for providing comments on the exposure draft. Furthermore, the study of this section highlights that the excess tax benefits and realizes the shortage as mentioned in the income statement that are not undertaken. Therefore, the balanced fairness approach introduces facts that minimize the volatility expenses that are mentioned in the income statement. The main objective of the assignment is to reduce cost as well as complexity for bringing improvements in the accounting for share-based payments that are issued to employees mainly for the public as well as private companies. FASB affirms with the proposed changes that aligns with the accounting for share-based payments as issued to employees in areas such as accounting for income taxes that gets along with vesting or resolution of awards, presenting excess tax benefits as shown in the cash flow statement, accounting for forfeitures, presenting employee taxes paid as shown in the cash flow statement when an employer withholds shares for meeting minimum legislative necessities as well as minimum statutory requirements.

FRC Investigation into KPMG Audit

This section deals with introducing FASB and recommending different accounting standards that allows exposure drafts and comments that are published by industries and corporate business enterprises (Ball, Grubnic & Birchall, 2014). This particular proposal takes into account accounting standards for updating the stock-based compensation and it has the topic number of 718. The mentioned standard title is Improvements of Non-employee share-based payment accounting (Klinglmair, Sala & Brandão, 2014). It is important to bring improvements in the non-staff share payment that assures proper reduction of cost. Furthermore, there are different complexities present that maintain accurate information of financial users that are mentioned in the financial statements of business enterprise. Therefore, the section mainly concentrates upon different agreed and non-agreed comments for initiating such standard for bringing improvements in the procedure of accounting in the most appropriate way. This section mainly emphasizes upon facts after recommending various important accounting standards as it updates stock based compensation for improving the procedure of accounting for ascertaining its idealness (Christ & Burritt, 2015).

Figure: Comment Letters (Financial Accounting Standards Board) of Heiskell and MacGillivray and Associates

Figure: Exposure Draft- Stock Compensation Topic 718- Improvements to Employee Share-Based Payment Accounting

  • Visa Inc

Figure: Request for comments on Exposure Draft of Proposed Accounting Standards Update on Compensation – Stock Compensation (Topic 718), or “the proposed update”

 Figure: IASB Exposure Draft 2015/3 - Conceptual Framework for Financial Reporting Association

From the IASB and Conceptual Framework, it properly explains about measurement bases in the Chapter 6. It discuss about various measurement bases and information that it provided with relevant benefits and limitations. The section even determines the factors that need to be considered at the time of selecting based on measurement. In the Exposure Draft, there is clear discussion of measurement bases that is categorized into different types such as historical cost, current value, fair value and value in use for assets as well as completion worth for liabilities.

In this exposure Draft, Question 8 is about Measurement bases that ask whether the measurement bases are properly described in the conceptual framework. If the answer is no, then to explain which measurement bases would be included with justifying reasons

In the Exposure Draft, Question 9 is about Factors that need to reflect on at the time of selecting a measurement basis. In this question, it ask about whether the IASB correctly identifies the factors at the time of measurement bases and if it is not defined, then explain it with justifying reason.

Settlement for Corruption Allegations

In the Exposure Draft, Question 10 is about More than one relevant measurement basis where question is asked whether to consent with the approach that is discussed in the paragraphs 6.74 to 6.77 and BC6.68.

Providing an in detail appraisal whether the behavior of controller in introducing the Exposure Draft can be clarified by public interest theory

Public Interest Theory is one of the economic theories where directive is abounding in reaction to the demand of the public for correcting an incompetent or unbalanced market performance. In addition, the regulatory body is treated for representing the interest that benefits society as it operates as it meets public interest of the regulators.

To explain in detail, the public interest theory as well as reputational theory relates to the above-mentioned article. Public interest theory explains the fact that there is high vulnerability in the market as well as has the propensity to function unsuccessfully that favor an individual rather than benefiting the overall community (Ball, Grubnic & Birchall, 2014). In order to monitor the market effectively, there is government intervention needed. The theory explains that there is development of regulations present as per public interest for correcting the ineffective practices. From social perspective, it is noted that there is inefficient regulations that involves private players as they are restricted to enter along with the competitors in the market (Klinglmair, Sala & Brandão, 2014).

Describing in depth where there is conformity or discrepancy between the parties who have presented Comment Letters

It is noted that Heiskell & MacGillivray and Associates agrees for modifying as per FASB. The other respondents (Visa Inc, American Bankers Association and Raytheon Company) disagreed to identify additional tax deficiencies as well as benefits that are mentioned in the income statement of business enterprise. The main reason behind this will be rising of volatility expenses that associate with income tax. It is therefore concluded it is essential for FASB for assuring public interest by evaluating the strength of the application and it helps accomplishing public interest.

Assessing whether the authors of the Comment Letters are utilizing the arguments for or against parameter

The authors of the comment letters enhance the process of stock compensation of most of the international business enterprise. It is required to prepare financial statements after reducing the pressure from the accountants as well as payment of cash related to the employers for tax holding. Furthermore, the major issue highlighted in the proposal is the detection of additional tax benefits as well as deficiencies as shown in the income statement of business enterprise. It is because of this reason that public interest for enhancing the overall economy. It is important to understand the fact that assured private interest gets along with proposal validity that should be achieved in the most appropriate way (Klinglmair, Sala & Brandão, 2014).

Reputational Theory on Business

Applying each of the theories of regulation (Public interest, Capture theory and Private interest) to the different issues in the four preferred comment letter and justifying which theory of regulation best explains the comment on the issues

In this proposal, it is clearly mentioned that the progress in non-staff share based accounting is critical as it looks at the sentiments of the staff for evaluating the business operation. The standard mainly gives an idea for encouraging each business for participating in the comment process for getting the feedback. Furthermore, FASB shows the alterations in the forms of questions as well as companies need to comment after getting the views. Business enterprise need to provide comments that relates to the business operations. In the standard, it includes tax benefits as well as deficiencies and complexity for maintaining information that is mentioned in the financial statements (Chatfield & Vangermeersch, 2014). Furthermore, it shows relationship between additional tax benefits as well as cash inflows that permits business entities for undertaking the accounting policy election, proposed expansion and tax payment procedures of the business. After getting feedback, the usefulness can be modified by determining activities for the overall economy.

Critically assess the fundamental statement and supposition of the theories of regulation with regard to their request to the issues recognized in the Exposure Draft and Comment Letters

Heiskell and MacGillivray and Associates

Heiskell and MacGillivray and Associates is one of the accounting and auditing firm in and across Australia that decided to the removal of the accounting tool of PIC for minimizing the level of cost and issues in the given secretarial processes (Klinglmair, Sala & Brandão, 2014). In addition, it is noted in the agreement that the business incorporates compensation expenses as mentioned in the income statement that requires implementing tax deficits as well as benefits. The third question relates to tax cash flow categorization, it is agreed that the action need to be considered in the operational activities. The company has properly agreed with all the modifications that had been proposed by FASB as these questions aligns with the public interest as well as accounting standard that are essential for both staff members and the business enterprise (Bebbington & Larrinaga, 2014).

 Raytheon Company

The company is one of the technological as well as innovation firms that believe in developing their brand image in the global market because of defense technologies and software that relates to civil market and security tools (Klinglmair, Sala & Brandão, 2014). Raytheon Company is US based business enterprise that intends to form effective corporate governance. The company had successfully answered 2, 3 and 5 questions that are mentioned in the exposure draft. These answers was not agreed with Heiskell and MacGillivray and Associates on matters relating to identification of additional tax benefits as well as deficiencies as mentioned in the income statement. It is recommended that symmetrical equity approach helps in obtaining for effective outcomes. It is due to this reason these realization accomplishes with the public interest as well as organizational interest ignores the complete facts. However, it would not be treated as identical with the theories like capture theory that agrees with the taxable cash flows. This concept will be treated as operational activity as well as allowed for stored amount to the highest marginal tax rates as and when applicable (Ball, Grubnic & Birchall, 2014).

Visa Inc

Recommendations for Rolls Royce

Visa Inc is one of the companies that operate in online payment technology that intends to bringing improvements in the international procedures of payments. Furthermore, it is noted that the modifications will help in providing benefits where disagreement gets aligned with identifying additional tax benefits as well as deficiencies as mentioned in the income statement. The alterations or modifications help in reducing level of complexity for most of the business enterprise. Therefore, the modifications help in accomplishing the overall public interest as well as organizational interest except the rejected ones.

American Bankers Association

American Bankers Association is one of the entities where the participants in the bank mainly operates in USA as well as believes in enhancing the entire banking system and operating activities at the same time (Klinglmair, Sala & Brandão, 2014). This entity had even shown that there is agreement present with the FASB changes as compared to tracking additional tax benefits as well as deficiencies as mentioned in the income statement. The real cause or reason behind disagreement is that as it leads to differences present in the expenses of compensation as well as financial statements. Therefore, the relationship suggests assurances that align with private interest theory as well as public interest theory.

References and Bibliography

Ball, A., Grubnic, S., & Birchall, J. (2014). 11 Sustainability accounting and accountability in the public sector. Sustainability accounting and accountability, 176.

Bebbington, J., & Larrinaga, C. (2014). Accounting and sustainable development: An exploration. Accounting, Organizations and Society, 39(6), 395-413.

Chatfield, M., & Vangermeersch, R. (2014). The history of accounting (RLE accounting): an international encylopedia. Routledge.

Christ, K. L., & Burritt, R. L. (2015). Material flow cost accounting: a review and agenda for future research. Journal of Cleaner Production, 108, 1378-1389.

Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.

Deegan, C. (2016). Financial accounting. McGraw-Hill Education Australia.

Dillard, J. (2014). 14 Legitimating the social accounting project. Sustainability accounting and accountability, 233.

Klinglmair, M., Sala, S., & Brandão, M. (2014). Assessing resource depletion in LCA: a review of methods and methodological issues. The International Journal of Life Cycle Assessment, 19(3), 580-592.

Meyer, R. E., Höllerer, M. A., Jancsary, D., & Van Leeuwen, T. (2013). The visual dimension in organizing, organization, and organization research: Core ideas, current developments, and promising avenues. Academy of Management Annals, 7(1), 489-555.

Miller, P., & Power, M. (2013). Accounting, organizing, and economizing: Connecting accounting research and organization theory. Academy of Management Annals, 7(1), 557-605.

Zeff, S. A. (2016). Forging accounting principles in five countries: A history and an analysis of trends. Routledge.

Zhang, X., Yan, C., Sun, X., & Xiang, Y. (2016). Research Issues and Methods of Contemporary Accounting Research and the Progress in Internationalizing Accounting Research in China: An Analysis of Research Articles in International Accounting Journals During 2009-2013. Contemporary Accounting Review, 1, 001.

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