ACC 577 Financial Accounting and Reporting
Discuss how the company’s management team can manipulate its earnings results though the adoption of different accounting methods and the obligation of accounting professionals to be transparent to shareholders. Earnings manipulation is usually not the result of an intentional fraud, but the culmination of a series of aggressive interpretations of the accounting rules and aggressive operating activities. Earnings management occurs when managers use judgments to purposefully alter operating results to mislead stakeholders into thinking the company is doing better than it really is or to gain a personal advantage. Various techniques can be used such as prematurely recognizing revenue, deliberately delaying expenses, changing estimates to inflate earnings, and improperly disclosing financial information.
It has been suggested that the effect of choices on management compensation, on existing debt agreements, and on union negotiations each can affect management's selection of accounting methods. For instance, research has suggested that managers of companies with bonus plans are more likely to choose accounting methods that maximize their bonuses (often those that increase net income). Managers can systematically use methods that consistently report lower expenses or higher revenues. Thus, managers can manipulate quarterly earnings to some degree and therefore maintain the ability within the rules of GAAP to make the numbers.
As potential or actual shareholders and accounting professionals, it would be behoove us to spend considerable time analyzing a firm’s financial reports, or at least the reports of those who have the ability to analyze financial statements with some degree of sophistication.
Assess how the start-up technology business may be impacted by the required compliance with U.S. GAAP accounting methods and make a suggestion for how the business managers should minimize the impact to the financial performance as a result of accounting compliance. Business managers require basic financial skills to manage their operations efficiently. They must minimize corporate liabilities and adhere to local, state and federal regulations. Business managers need to know how to prepare financial reports that provide information about a company’s performance. External investors, creditors and government authorities review these reports according to Generally Accepted Accounting Principles guidelines.
Business managers need to be able read a profit and loss statement and balance sheet to identify a company’s assets -- the obligations to pay debts known as liabilities plus the owner’s equity. Being able to read financial statements that display company income and expenditures enables a business manager to make sound decisions. Developing strong analytical skills enables a business manager to make business decisions that help the company achieve its strategic objectives.
Business managers need to interpret financial ratios -- performance metrics -- to make these decisions. They should have a working knowledge of how to calculate "net profit margin" -- net income divided by total revenue -- and "debt-to-equity ratio" -- total debt divided by equity capital. Business managers have a responsibility to perform financial tasks with integrity. For example, expense reports must be in alignment with the company’s mission, values and goals. Business managers diagnose problems and work toward solutions to ensure compliance. Assume that the privately held technology company decides to become a publicly traded company on the NASDAQ and is required to adopt International Financial Reporting Standards (IFRS). Determine the areas of the balance sheet that will be impacted by the shift and how the stock market is likely to respond to this change in accounting methods. The area of the balance…