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The Role Of Government In Business Is Very Important In A Country

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Question:

Discuss about the Government in Business ?
 
 

Answer:

Introduction

In Australia there are government bodies which work to protect the interests of the investors and creditors. This is achieved by ensuring that companies make proper financial statements based on accounting standards. It is Australian Securities and Investments Commission which is entrusted with ensuring the implementation of Corporations Act by the government (ASIC, 2017). This report is an effort to understand what are the documents the companies have to submit to ASIC and how their financial statements are properly audited by external auditors. The role of the Australian Accounting Standards Board in making different accounting standards is looked into. Further it is found what are the listing requirements of Australian Stock Exchange. The role of the Reserve Bank of Australia as a financial regulator is also discussed.

 

Regulatory framework under Australian Securities And Investments Commission

Companies are business entities in which large amounts of money are invested to carry out the business of the firm. Therefore it is needed that companies maintain a proper system of recording their business transactions. There would be investors and creditors of the company who would like to be sure that their money is properly being used by the management for carrying out the business activities. All this would become clear from the financial statements of the company, namely, profit and loss account and balance sheet (Kimmel, Weygandt and Kieso, 2012). In Australia, companies are required to maintain proper financial records and prepare their financial statements in accordance with the provisions of the Corporation Act. The regulatory authority which makes sure that this is being done is known as Australian Securities and Investments Commission (ASIC).

Companies are required to deposit their financial statements with ASIC if there is substantial money involved, the general public has invested funds and the companies exist for carrying out charitable activities and not for making profits. In the case of charitable companies also there should be proper accounting so that money donated by people is properly used. Section 292 of the Corporations Act requires all disclosing entities, public companies, companies limited by guarantee, all large proprietary companies that are not disclosing entities, all registered managed investment schemes to prepare financial reports (ASIC, 2017).

The companies are required to get their financial statements audited by external auditors as per the provision of the Corporation Act. The financial statements of the company would carry an auditor’s report in which the external auditor would give the audit opinion (Leung et al., 2014). This audit opinion reflects whether the financial statements reveal a true picture of the financial position of the company or not. There are different types of opinion an auditor can give. Where the auditor gives an unmodified opinion, it means that there is no material misstatement in the financial statements. In case the auditor gives an adverse opinion, it means there is material misstatement and it is all pervasive. In this case the provisions of Corporation Act and the Australian Accounting Standards have not been followed to some extent. This means there has been a mistake by negligence or deliberate fraud in maintaining accounting records of the company.

According to Mock et al., (2012) there is sometimes a difference between what the financial statement user expect the auditor’s report to deliver and what the auditor wants to deliver. There can be communication and information gap. The financial statement user lack knowledge and are not able to interpret what auditor is saying in the report in the right manner. There are certain anxieties of shareholders and creditors which the auditor’s report should address and which it fails to address in many cases. There needs to be more communication between auditors and shareholders who appoint them.

Australian Securities and Investment Commission checks the financial statements of selected companies also to find out if there is some mistake in their preparation. The financial statements of a company can be manipulated to show less amount of profits so that lesser amount of taxes are to be paid. This is where the auditor’s work becomes so important (Porter, Simon and Hatherly, 2014). The auditor would have access to the accounts of the company. The individual would take a sample of the accounting entries and trace how these entries have been made. The auditor would check if the accounting standards have been followed in the calculation of the amount of assets like machinery and plant. Similarly it would be checked if the amount of expenses shown in the profit and loss account have actually been incurred. This would reveal if there are fictitious expenses included to decrease the profits.

 


A company has to prepare its financial statements according to the provisions of the Corporation Act. All the expenses incurred and income earned during the year have to be shown in the profit and loss account in a proper way in a chronological order. Similarly the balance sheet would have the items like goodwill, patents and financial instruments held by the company. The objective is that nothing important is left out in the financial statement so that a true and fair picture of the financial position comes out in the open.

Financial reports prepared in accordance with the Corporations Act 2001 must generally comply with Australian Accounting Standards which meet the requirements of International Financial Reporting Standards (IFRS) which Australia adopted in 2005. According to Brown and Tarca (2005), since 2005 AASB issues standards based on IFRS rather than making standards from the beginning. The areas where significant changes have been made include the recognition and measurement of intangible assets including goodwill, share based payments, employee benefits, financial instruments, investment properties and impaired assets.

Chua, Cheong and Gould (2012), have examined the effect on accounting quality following the adoption of IFRS on January1, 2005. The focus of study was on earnings management, timely loss recognition and value relevance. It was found that earnings management by way smoothing had reduced. The losses were recognized on time. The values given in the financial statements had become more relevant, more so, in case of non financial companies.

Ahmed, Chalmers & Khlif (2013) have studied effects of IFRS adoption on value relevance and transparency in earnings recognition in case of discretionary accruals. They have further studied the effect on capital market with regard to the quality of earnings forecasting. They have come to the conclusion that value relevance of book value of equity has not increased. Value relevance of earnings has increased. Discretionary accruals have not reduced. Accuracy of analysts forecast of earnings has improved very much. 

Australian Accounting Standards Board

Australian Accounting Standards Board provides the conceptual framework of accounting. In other words, it specifies which are the business transactions which are to be recorded. It also provides how expenses and revenues are to be recognized and measured. Similarly how assets and liabilities are to be recognized and measured. The definitions of expense, revenue, assets and liability are given in the conceptual framework. This basis of accounting process is also provided by the accounting standards.

The financial statements have to be prepared by the companies on the basis of the accounting standards (Australian Accounting Standards Board, 2017). If the accounting standards are not followed by a company, Australian Securities and Investment Commission would take action against the company and action would be also taken against the auditor if the individual has been totally negligent in performing duties and gives an unmodified opinion when there are gross mistakes in the making of the financial statements. Some of these accounting standards made by Australian Accounting Standards Board are discussed below:

Firstly there is AASB 102 that relates to the inventories which are goods held by the company for resale. This is true in case of a trading company. In the case of a manufacturing company, inventories consists of raw materials, work in progress and finished products. Inventories are to be shown in the books as an asset till they are realized as sale. According to this accounting standard, inventories would be valued at cost or net realizable value whichever is less (Aasb.gov.au, 2017). Cost of inventories includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Costs of purchase includes the purchase price, import duties, other taxes (other than those which can be recovered by the company later from tax authorities) and transport, handling and other costs directly attributable to the acquisition of goods. Other costs includes costs incurred for converting raw material to finished goods like direct labour and overheads.

It becomes clear that how inventories are to be valued has been explained in great detail in the accounting standard. This is done because there are different types of companies engaged in varied businesses. The accountants sometimes get confused on how to apply the accounting standard in making the financial statements. All these details help to clear the confusion and ensures to a great extent that companies rightly recognize and measure their inventories which are of significant amount in most of the companies.

Secondly, there is AASB 116 relating to property, plant and equipment. According to this accounting standard cost of acquiring property, plant and equipment will be recognized as an asset if cost of acquiring can be ascertained and its future economic benefits will accrue to the company (Aasb.gov.au, 2017). Cost of the asset would include delivery and installation costs. If cost model is used, then asset would be shown at a value equivalent to the cash price paid minus any depreciation. If revaluation model is used then fair value is ascertained at regular intervals using the prevalent market price of the asset.

Accounting standard relating to property, plant and equipment is made because sometime a company would try to overvalue its assets in order to accomplish more market value of its shares. The creditors of the company could be misled by overvaluing the asset of the company so that they lend more to the company feeling that their investments in the company are safe.

According to Christensen and Nikolaev (2013), most of the accountants record non financial assets in their balance sheet at the historical cost. There are accountants in some parts of the world who record assets at their fair value as determined by the prevailing market price. But there could be several markets and several market prices. This is the reason why most accountants record assets at their cost price or historical cost.

According to Steenkamp et al., (2016), more strict requirements of AASB 138 which came into effect from 1 January 2005, about capitalizing research and development spending led to a change in managerial decisions. Managers started reducing research and development spending to show more earnings. Thus long term advantages of research and development spending were lost. The chance of long term growth through product developments was left.

 

Financial reporting council

Financial reporting council is a statutory body responsible for overseeing the process of making the accounting standards in Australia (Financial Reporting Council, 2017). It is involved in appointing the members of Australian Accounting Standards Board (AASB). It also gives sanction and monitors the AASB’s budgets and business plans. The organizational structure of AASB is formed on the advice of Financial reporting council which gives directions and advice to it on policy to be followed by it. Financial Reporting Council monitors the current accounting standard to see if they are still relevant. It encourages the use of suitable accounting and auditing standards in Australian accounting.

Australian Stock Exchange (ASX)

Australian Stock Exchange admits securities to its official list and for quotation after thorough investigation and submission of certain documents by the companies (ASX, 2017). The company has to fulfill minimum quality and size of operations. The company has to disclose minimum information about itself, the kind of business it is doing. It has to prove that people are interested in buying its shares. It has to later on disclose information that would have material effect on the prices of the securities. The company has to submit financial statements which are made in accordance with accounting standards and are audited. It has to submit information about it corporate governance practices.  Its shareholders should have the freedom to express their opinions to board and the management. The company has to lodge a prospectus with the Australian Securities And Investment Commission. The entity must be a going concern.

Australian Stock Exchange has laid down a list of formalities the companies have to fulfill in order to get listed. This means that only good companies get listed after thorough investigation. This protects the investors and builds their confidence in the capital market.  Christensen, Kent, Routledge & Stewart (2015) undertook a study about whether the implementation of Australian Securities Exchange Limited’s 2003 governance recommendations improved accounting, earning quality and market value of small and large companies. Many companies adopted these recommendations when they were introduced and formed audit committees leading to better earnings. Better auditing leads to cost control and minimization of frauds and other benefits.

A study by Cybinski & Windsor (2013), investigates whether voluntary remuneration committee independence matches chief executive officer’s pay and bonuses with the company’s financial performance. This study was done after Australian Government Productivity Commission recommendation to allow remuneration committee independence for ASX 300 companies. This study shows firm’s size plays a role in CEO’s remuneration. ASX 300 large firms link to a greater extent CEO’s pay to firm’s financial performance as compared to smaller firms.

Chapple, Clout and Tan (2013), undertook a study to find out about the governance attributes of firms that have been subject to securities class actions which are brought up when there is violation of securities laws by the company. These companies had lower standards of corporate governance. They were subjected to more queries by Australian Securities Exchange. ASX also suspected that something was wrong. 

Reserve Bank of Australia

Reserve Bank of Australia is the central bank which is a primary financial regulator of the country. The bank is responsible for undertaking monetary policy and for over all financial system stability. This stability can be threatened by events like recession and excessive inflation. If there is instability in the financial system, the central bank is the lender of the last resort. It would lend to manufacturing industry and banks and financial institutions. The bank operates the monetary policy (Reserve Bank of Australia, 2017). If there is lot of inflation in the country and the prices of the commodities become very high, the central bank would take steps to ensure that the rates at which the commercial banks lend to the industry and people becomes high. This would mean that the people would reduce their demand for goods as loans have become costly. This would result in prices of goods going down. As the value of money increases the exchange rate for Australian dollar would also become higher. In this way the bank also influences the exchange rates of Australian currency.

The central bank also ensures that payment and settlement system between entities goes on properly. For this purpose the bank has entered into an agreement with Australian Securities and Investment Commission.

Baxa, Horváth  & Vaší?ek (2013) have studied how selected central banks including that of Australia responded to periods of financial stress. The findings of the study were that central banks make a change in interest rates decreasing them in the face of high financial stress so that there is more economic activity. If there is stock market stress or banks are under stress or exchange rate stress is there, there will be a change in monetary policy rates. 

 

Conclusion

In a developed old democracy like Australia many bodies have been made by government over the years to support and regulate business. One of them is ASIC which takes action to implement the provisions of Corporations Act. The companies have been responding well to the initiatives of the government and getting their financial statements audited and fulfilling the listing requirements of ASX. There is the need to frame new accounting standards with changing times and these have to be clear and concise to avoid confusion. The adoption of IFRS has led to improvements in areas like value relevance of earnings.

 

References

Aasb.gov.au (2017). Compiled AASB standard AASB 116 property, plant and equipment. Retrieved from: https://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun14_07-14.pdf

Aasb.gov.au (2017). Compiled accounting standard AASB 102 inventories. Retrieved from: https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-04_COMPjun09_01-09.pdf

Ahmed, K., Chalmers, K. & Khlif, H. (2013). A meta-analysis of IFRS adoption effects, The International Journal of Accounting, 48(2), 173-217. Retrieved from: https://www.sciencedirect.com/science/article/pii/S0020706313000472

ASIC (2017). Lodgement of financial reports. Retrieved from : https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/preparers-of-financial-reports/lodgement-of-financial-reports/

ASX (2017). Listing requirements. Retrieved from: https://www.asx.com.au/listings/index.htm#howtolist

Australian Accounting Standards Board (2017). Home. Retrieved from: https://www.aasb.gov.au/Home.aspx

Baxa, J., Horváth, R., & Vaší?ek, B. (2013). Time-varying monetary-policy rules and financial stress: does financial instability matter for monetary policy?. Journal of Financial Stability, 9(1), 117-138. Retrieved from: https://www.sciencedirect.com/science/article/pii/S1572308911000520

Brown, P. and Tarca, A. (2005). 2005-it’s here, ready or not: a review of the Australian financial reporting framework, Australian Accounting Review, 15(2), 68-78.

Chapple, L., Clout, V. and Tan, D. (2013). Corporate governance and securities class actions, Australian Journal of Management, 39(4), 525-547. Retrieved from: https://journals.sagepub.com/doi/abs/10.1177/0312896213512320

Christensen, H.  & Nikolaev, V.  (2013). Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), 734-775. Retrieved from: https://link.springer.com/article/10.1007/s11142-013-9232-0

Christensen, J., Kent, P., Routledge, J., & Stewart, J. (2015). Do corporate governance recommendations improve the performance and accountability of small listed companies?. Accounting & Finance, 55(1), 133-164. Retrieved from: https://onlinelibrary.wiley.com/doi/10.1111/acfi.12055/abstract

Chua, Y., Cheong, C.  & Gould, G. (2012). The impact of mandatory IFRS adoption on accounting quality: evidence from Australia, Journal of International Accounting Research, 11(1), 119-146. Retrieved from: https://www.aaajournals.org/doi/abs/10.2308/jiar-10212

Cybinski, P., & Windsor, C. (2013). Remuneration committee independence and CEO remuneration for firm financial performance, Accounting Research Journal, 26(3), 197-221. Retrieved from: https://www.emeraldinsight.com/doi/abs/10.1108/ARJ-08-2012-0068

Financial Reporting Council (2017). About the FRC. Retrieved from: https://www.frc.gov.au/about_the_frc/

Kimmel, P., Weygandt, J. and Kieso, D. (2012). Financial accounting (7th edn.). Australia: Wiley.

Leung, P., Coram, P., Cooper, B. And Richardson, P. (2014). Modern auditing and assurance service (6th edn.). Australia: Wiley.

Mock, T., Bédard, J., Coram, P., Davis, S., Espahbodi, R., & Warne, R.  (2012). The audit reporting model: current research synthesis and implications, Auditing: A Journal of Practice & Theory, 32(sp1), 323-351. Retrieved from: https://www.aaajournals.org/doi/abs/10.2308/ajpt-50294

Porter, B., Simon, J. and Hatherly, D. (2014). Principles of external auditing (4th edn.). Australia: Wiley.

Reserve Bank Of Australia (2017). Monetary policy. Retrieved from: https://www.rba.gov.au/monetary-policy/

Steenkamp, N., Steenkamp, N., Steenkamp, S., & Steenkamp, S. (2016). AASB 138: catalyst for managerial decisions reducing R&D spending?, Journal of Financial Reporting and Accounting, 14(1), 116-130. Retrieved from: https://www.emeraldinsight.com/doi/abs/10.1
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