Research Topics: Financial Report

To what extent should the financial reporting practices of public sector organizations differ from those used by companies in the private sector?

Public sector is consists of nonprofit organizations which have come into existence primarily to provide services that society, or some segment thereof, feels are needed but cannot be effectively provided by for-profit entities. The public sector includes education, religious, health, civic, and other organizations. These organizations spend considerable sums of money and employ a substantial workforce.   Public financial reporting in the government and private sectors, however, has increasingly come to the attention of the public, regulators, financial sources, investment analysts, and investors. This attention has been heightened by concerns over business activities, the economy in general, and the consequences of inadequate or improper financial reporting for particular corporations and mutual funds.   The nature of the information which the public sector is reported in its financial reports is influence with some of the distinguishing features of it operating environment. These distinguishing features are enumerated as follows (IFAC Public Sector Committee Study 11, 2000):   Ø      Generally, the public sector does not exist to make a profit. Instead, the public sector is generally concerned with the welfare of its citizens, determining the best way of financing the goods and services that it wishes to provide to its citizens and establishing the regulatory framework within which business is conducted. Although the functions undertaken by public sector organizations vary across jurisdictions and within differing levels of government, such functions often include the provision of health, education and defense. The absence of a profit motive for most public sector entities apart from business enterprises means that a variety of financial and non-financial performance indicators may be required in order to assess performance. Ø      Governments as a whole tend to obtain most of their revenue from taxes and other non-reciprocal transactions. Unlike the parties to a reciprocal transaction, taxpayers have no choice about entering into the transaction and have no guarantee that they have received value for money. Even where citizens enter into reciprocal transactions with individual government entities those entities may have a monopoly on the provision of a service. Ø      Authorization to use public resources and the management of those resources are usually conducted by different arms of government, the legislature and the executive. The legislature has the right to hold the executive accountable for its management of financial affairs and the use of financial resources entrusted to it. Public sector entities are usually required to demonstrate that to the best of their ability and available resources, they have provided the goods and services required by citizens, at least cost. In contrast, private sector entities are usually accountable to shareholders for making a return on funds employed in a competitive environment, rather than for the nature of the goods and services that they have provided.   With these distinguishing characteristics of the public sector, additional  forms of reporting that do not usually form part of the traditional model for private sector financial reporting such as non-financial performance reporting and compliance reporting are being added to the financial reports that the public sector are needed to report.   Generally, the main objective of financial reporting, either in private or public sector, is that information should meet users’ needs. According to the IASC Framework for the Preparation and Presentation of Financial Statements, “The objective of financial statements is to provide information about the financial position, performance, and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions”. (1989, paragraph 12)   In the case of the public sector, financial reporting should demonstrate the accountability of the government or unit for the financial affairs and resources entrusted to it, and provide information useful for decision making by providing and indicating the following (IFAC PSC Study 1, 1991, paragraph 63):   Ø      Indicating whether resources were obtained and used in accordance with the legally adopted budget. Ø      Indicating whether resources were obtained and utilized in accordance with legal and contractual requirements, including financial limits established by appropriate legislative authorities. Ø      Providing information about the sources, allocation, and uses of financial resources. Ø      Providing information about how the government or unit financed its activities and met its cash requirements. Ø      Providing information that is useful in evaluating the government’s or unit’s ability to finance its activities and to meet its liabilities and commitments. Ø      Providing information about the financial condition of the government or unit and changes in it. Ø      Providing aggregate information useful in evaluating the government’s or unit’s performance in terms of service costs, efficiency and accomplishments.   The overall goal of external financial statements, either in private or public sector, is to provide information that serves as useful input to users’ decision models. If this goal is to be achieved, the basic financial statements of nonprofit organizations should provide information about: Ø      The amount and nature of the assets, liabilities and net assets of the organization; Ø      The effects of transactions and other events and circumstances that change the amount and nature of net assets; Ø      The amounts and kinds of inflows and outflows of economic resources during a period and the relation between the inflows and outflows; Ø      How an origination obtains and spends cash, its borrowing and repayment of borrowing and other factors that may affect its liquidity; and Ø      The service efforts of an organization. Communicating useful information can best be achieved by requiring non-profit organizations to provide a Statement of Financial Position, a Statement of Activities and a Statement of Cash Flows. However, public sector organization and the private sector organizations differ in some aspects of the financial reporting practices. Accountability and rendering of accounts in the public sector were originally connected with the use of financial resources where accountability is based on the presentation of accounts or performance in accounting terms (Tomkins, 1987). However, since the 1990s, various authors dealing with performance in the public sector have criticized this limited approach (Humphrey et al., 1993, p. 19) and suggested that its scope should be expanded to go beyond the typical accounting justification. However, in private enterprise the concept of rendering of accounts has been modified as a result of a broadening of the concept of accountability and a broadening of the scope of the information to be provided, its form of presentation and access. In the private sector, we must add to this process of redefining rendering of accounts the harmonization of financial information that is occurring on an international level. In the field of public administration, the problem of accountability and the rendering of accounts present even greater difficulties since we are talking about public resources, and there are no measurements or indicators that can provide immediate and direct information on performance as profits do for private enterprise. As a result, the type of information provided in order to adequately comply with the principle of accountability takes on a greater importance. A comparison of regulations reveals the interest there is in financial information serving this purpose: to render accounts. Thus, the Government Accounting Standards Board (1987) in their Concepts Statements, no. 1, considers the objective of public financial information of the public institutions from the point of view of the government’s obligation to be publicly accountable and to permit users to evaluate that accountability. On its part, the National Council on Governmental Accounting (NCGA) in their Concepts Statements, no. 1 (1982) indicates that the general objective of the accounting and financial information on government bodies consists of: 1. Providing financial information that is useful for taking political, economic, and social decisions and demonstrating responsibility and good management; and 2. Providing information that is useful for evaluating the performance and actions of the organization. For the NCGA’s document no. 1, financial information and the preparation of financial statements are not synonymous, and financial information is not limited to simply enumerating the things that have been done in the past. Also, the private and public sector differ on the number of users of the financial information. In the case of the private sector, they are just concern with only one user, the investor.   However, in the field of public financial information the range of users is even broader and, thus, even less precise. The General Public Accounting Plan lists in Section 7 of its introduction the following users:    “Targets for information on public accounting include a very wide range of collectives, from the governing organs of the institutions to citizens as such, along with companies and employers’ organizations, workers and trade unions, suppliers of goods and services, loan companies and other credit institutions, persons responsible for economic, financial and tax policies at their different levels, parliaments and other assemblies, whether legislative or not, organs of outside control responsible to those assemblies and, in general, all those groups that are affected in one way or another by the economic-financial activity of the public sector, which are practically, for one reason or another, and from different points of view, all those who make up the political, economic and institutional fabric of society.”   Such a large conglomeration of targets for financial information on public bodies, together with aspects such as the complexity of the information and the coming into play of the phenomenon of the free-rider, result in a considerable restriction of real users, who at this time can, in practice, be considered to be confined to political institutions and control agencies. A process similar to that which has been initiated in the private sector would involve making the citizen the user or interested party with preferential status.   In addition, in the public sector, the rendering of accounts should begin with the definition of objectives to be achieved. These are not, as in the private sector, objectives that can be taken as self-evident, such as maximizing profits, cash flow, or producing ‘value for the stockholder.’ Thus, it is here that planning and strategic information acquire a particular relevance in public institutions. Moreover, in the public sector, external control acquires broader forms, ranging from a control of legality to, theoretically, monitoring efficiency, and including financial control and auditing accounts. Thus, again theoretically, public institutions have an advantage over the private sector. It should be kept in mind in this respect that the figure of the audit originated as a means for control of the republic.   However, although there are certain differences in the financial reporting practices of the private and the public sector, there are also some similarities between the practices of these two sectors in terms of the information required to manage, or hold individuals to account for their management of entities. The International Accounting Standards is with relevance and contains much useful guidance to the extent that public sector entities want financial information on cash flows, assets and liabilities, and changes in those assets and liabilities with which the accounting models and accounting standards developed by the private sector. Although private sector standards do not address some of the issues faced by governments such as the recognition of taxation revenues, they provide guidance on many of the other issues faced by governmental accountants.   With the case of governmental financial reports, these are reports which are prepared for a range of external users who are unable to require or to contract for the provision of special reports to meet their specific information needs. The reports are designed to meet the common needs of these external users. Mostly, the external users of the public sector reports have limited access to information and rely heavily, if not exclusively on governmental financial reports.   According to IFA Public Sector Committee Study 11 (2000), governmental financial reports, in common with private sector financial reports, are not intended to provide all the information needed by users.   The scope of governmental financial reports is constrained in the following ways as enumerated by IFA Public Sector Committee Study 11 (2000): Ø      They are financial reports. Items which cannot be quantified are not included in the financial statements totals, although they may be disclosed as additional information in the notes. Users may seek other sources of information, including statistical data, demographic information, narrative assessments, and reports on general economic conditions and the political environment to meet their needs. Ø      They provide information in respect of the reporting entity which has prepared the reports. The reporting entity may be an individual government department or it may be a collection of all government agencies of a certain type. The reports therefore focus on the activities of a government agency or a particular level of government. They do not usually combine information on different levels of government or information on the government and the rest of the economy. Financial information on the entire government sector and the national economy is usually produced by way of Government Finance Statistics and the System of National Accounts or regional equivalents respectively. Ø      They provide information on financial performance rather than service performance. Performance reporting includes information on the nature, quality, quantity, cost etc of the goods and services provided by governments. Ø      They are external reports rather than internal reports. Although senior management may use the information in governmental financial reports, management typically has access to more detailed information for decision making. For example, although the governmental financial reports may measure assets at historical cost, management reports may contain both historic cost and current market values for certain categories of assets. Ø      The basis of accounting underlying the governmental financial reports may differ from that used in the preparation of the budget documents, and accordingly, certain accounting principles may differ between the two. For example, budget documents may contain authorizations for obligations or commitments. Unless obligations or commitments meet the definition of a liability under the accrual basis of accounting, they are not recognized as an element under any basis of accounting described in this Study. Ø      They generally portray the effects of past events. Financial reports prepared at year-end contain information on the impact of transactions and events during the reporting period on the financial performance and position of the entity. Although governments may choose to provide prospective financial information such as forecasts of future events and transactions in their financial reports such information is traditionally found in budget reports only. Ø      Compliance reporting may be incorporated in the governmental financial reports. Although reporting on compliance with budgets and appropriations is an important form of reporting for many government entities, this reporting may be included within a governmental financial report, the budget documents for the next year, or published as a separate report.   “In the public sector, information on service performance may be incorporated as part of governmental financial reports or may be prepared as a separate report. Performance measures and indicators, both planned and actual, can be set out in the budget or plan. Actual results are measured using those measures and indicators. Such information can include comparisons of budgeted and actual output quantity and quality. It may also include a discussion of the relationship between outputs and outcomes. Some governments also report on general economic statistics such as unemployment, Gross Domestic Product, inflation, interest rates, balance of trade etc.” (IFA Public Sector Committee Study 11, 2000)     References   Humphrey, C.; Miller, P.; Scapens, R. W. “Accountability and Accountable Management in the UK Public Sector,” Accounting, Auditing and Accountability, 6, 3, 1993, pp. 7-29.   IFAC Public Sector Committee (1991), Study 1, Financial Reporting by National Governments, IFAC Public Sector Committee   IFAC Public Sector Committee (2001), Study 11, Government Financial Reporting: Accounting Issues and Practices. IFAC Public Sector Committee   IASC (1989) Framework for the Preparation and Presentation of Financial Statements, July (1989)   Governmental Accounting Standards Board. Objectives of Financial Reporting, Concepts Statement no 1. Connecticut, 1987   National Council on Governmental Accounting. Objectives of Accounting and Financial Reporting for Governmental Units, Concepts Statement no. 1. Chicago, 1982.   Tomkims, C. R. Achieving Economy, Efficiency and Effectiveness in the Public Sector, London: Kogan Page Limited, 1987.     Credit:ivythesis.typepad.com

To what extent should the financial reporting practices of public sector organizations differ from those used by companies in the private sector?

Public sector is consists of nonprofit organizations which have come into existence primarily to provide services that society, or ...

A PAPER ON MANAGERIAL ACCOUNTING AND FINANCIAL REPORTING OF BRITISH TELECOMMUNICATION GROUP AND NTL

The Level of IAS Compliance of BT and NTL and Consequences on Users   Introduction             This paper aims to analyze and expand the statement that “the objective of financial statements is to provide information about the reporting entity’s performance and financial position that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions”.  Such effort will be done by evaluating the financial reports (FS) of two companies in the same industry regarding their compliance with international standards and such compliance added value to users of FS primarily (e.g. equity) investors.  It is initially thought that compliance with international standards increase the added-value FS provide to users because such standards have universality and incorporates integration across country preference.  This initial idea can also be checked while reading the paper.   Background             British telecommunications (BT) is a UK-based company that operates in 170 countries with principal stakes in networked IT services, telecommunications services and other broadband/ internet products (2005 ).  On the other hand, NTL is also a UK-based company and operating in UK soil but is headquartered and listed in the US ( 2005 ).  Its businesses are broadband, digital television, telephony, content and communications services with 50% consumer and 85% business customers within UK.  Due to this, it is expected that there will be size and policy differences but the focus would on the following policy frameworks.  Also, there is no available 2006 Annual Report for NTL and so the two companies will be analyzed based on their 2005 FS.  But to note, 2005 FS are not yet based on IAS for both companies that level of compliance would be very low.   First, IAS 1 lays down the presentation, structure and other disclosure requirements of entities with regards to the making of general-purpose FS (IASB 2006).  AIS 1 is guided by the principle of fair presentation by which an entity can achieve after diligent compliance with international standards.  When fairness is deemed on FS, users of such information can have a useful and pertinent decision-making platform.  Also, AIS 1 ensure that FS of an entity is comparable historically to itself and to other entities (e.g. product and capital competitors).  With this, AIS 1 sets out guidelines such as basis, formats and minimum requirements in preparing FS (2006).          Another, IAS 8 largely deals with accounting policies and changes to them initiated by the entity.  This guideline is much a complementary to IAS 1 because the fact that an entity changes, use or defer to use international standards make its FS incomparable historically to itself and other entities.  Fair presentation is also adversely affected.  IAS 8 sets out implications of one’s accounting policies especially with changes in accounting estimates and emergence of errors ( 2006).  Thus, it aspires to protect users against the risks of misleading forecasts about the past, present and future financial performance of an entity.  The leniency of IAS 8, however, is eminent in its submission for an entity’s use of managerial judgment in setting its own policies as last resource.   Body of the Paper and Relevant Discussions According to IAS 1, minimum content of FS should include balance sheet (BS), income statement (IS), statement in changes in equity (SICE), cash flow statement (CFS) and necessary explanatory notes (EN) (IASB 2006).  However, NTL did not have extra-column for every account that requires further explanation.  At the end of every FS, it merely reminds the reader to “See accompanying notes” ( 2005).  This can tantamount for users to be annoyed and de-motivated in searching for a relevant EN.  For example, the necessary notes for the effects of “loss from continuing operations” on average number of shares outstanding is found in f-20 while such account is located in Consolidated Statements of Operations in f-5.                On the other hand, BT complied with such minimum requirements on FS content (BAR 2005 pp. 75-80) avoiding the mistake of NTL in assuming unique FS titles (e.g. IS is tagged as Consolidated Statement of Operations).  For EN, BT also complied () assuring that every aggregated account in each FS titles are explained and presented to users in a convenient manner.  For example, total turnover under IS is referenced with 2 under notes column which makes it easy to navigate and refer information regarding the company’s geographical, product and area that resulted in sales ).  In effect, users and especially potential investors who are not familiar with the FS of the entity can assess performance and other components efficiently.               According to IAS 1, all FS should be presented in accrual basis except the CFS ( 2006).  However, NTL accounted for deferred income taxes, deferred finance costs, prepaid expenses, accounts payable, accounts receivable, accrued expenses and deferred revenue under its CFS (p. f7).  As a result, real cash assets of the company are not reflected because CFS has elements that are not recorded under cash basis.  The amounts of such accrued accounts are huge and are material in nature.  For example, accrued expenses and deferred revenue are two of the highest net values that changes operating assets and liabilities (p. f7).  In effect, potential investors are caught under dim decision framework especially in evaluating liquidity of the company and its ability to finance day-to-day operations without losing solvency or face litigation.               In the contrary, BT complied with CFS exemption from accrual accounting (p. 79).  For example, accounts pertaining to tax deferrals are replaced by taxation paid and further classified in UK and non-UK obligations.  This makes BT’s CFS to fulfill the promise of this specific FS to guide investors in determining the certainty and timing of cash flows the firm would expect ( 2006).  BT uses indirect method in presenting CFS as well as NTL and both also classified their CFS according to IAS 1 which is categorizing accounts into operating, financing and investing activities ( 2006).    However, both companies failed to disclose the maturity of their investments to confirm that they are cash-earners (.  IAS 1 requires CFS accounts to be consisted of investment which have maturity not exceeding three months from the date of acquisition (IASB 2006).  But this provision cannot be determined without the entity disclosing related information about the nature and background of a related investment recorded in CFS.  BT, which is confirmed earlier as having the upper hand in EN, also failed to explain the nature of CFS components.  The lacking is much for NTL.  BT includes mere three EN, compared to substantial EN in IS, and the maturity of “returns from investments and servicing finance” is not indicated in either of the notes (p. 79 and p. 88).               In terms of materiality and aggregation coinciding with IAS 1, NTL seemingly outperforms BT as the former indicated separation of accounts in the face of IS (p. f5).  The latter, although referenced its aggregation with corresponding EN, IAS 1 is clear that similar items that are material should be separated while dissimilar items can be aggregated if immaterial ( 2006).  For example, NTL readily specified the components of costs and expenses like operating costs, selling expenses, administrative expenditures, depreciation and amortization (p. f5).  On the other hand, BT aggregated operating costs (p. 75) amounting to at least three-fourths of its turnover.  Also, it is noticeable that corresponding EN is not available for “other operating income” and “profit from the sale of fixed asset investments” which are far above the share of minority interests in the bottom-line (e.g. meaning they are material).               Failure to provide ready information about the components of a certain material and aggregated account can post decision problems to potential and current investors.  For the former, it would not have clear data in which the company is spending too much or too less and if a significant corporate assets (e.g. trademark on technologies) is executed.  Such scenario would have change the current impression and future outlook of the incumbent investor.  But since individual elements are not stated or rather located in EN, the company seemingly escapes an adverse investor reaction.  For the latter, the given unfamiliarity of corporate operations deepens the ambiguity on what present investors are experiencing.               The above investor adversaries may as well take effect when both companies included in there are accounts which have a face name of “extra ordinary” (2006).  In the contrary, both companies did not aggravate this situation because all transactions that affects IS are disclosed may it be gains from foreign currency trading () or interest receivable ().  In the contrary, going intensive to the scope of IAS 1, NTL fell behind the requirement that in using functional IS (e.g. cost of sales, selling, administrative), the minimum requirement is to indicate depreciation, amortization and staff cost (IASB 2006).  Staff costs is not reflected in its IS (p. f5).  Investor ambiguity is confronted with added pressure.               According to IAS 1, the following should be complied in the FS of the entities; namely, separation of enterprise and company, consistent reporting period and similarity of face values of FS across annual reports (2006).  All are intended to maintain comparative stances of FS internally (e.g. historic accounts) and externally (e.g. competitor’s FS).  The first prerequisite is denied by NTL which clearly stated in every FS that the information contained is for “NTL Incorporated and Subsidiaries” ().  The third prerequisite is also tarnished in which NTL under SICE included a dollar amount (e.g. $) to determine the par value of its common stock even if the total amount is in pound sterling (e.g. £).  In the contrary, BT did not commit the same mistake.  There is no problem for the second prerequisite as both companies either restated or show performances from 2003 to 2005.                The problem of incomparability is the cornerstone of why AIS 1 is created and so the failure of entities to make their FS comparable supersedes the idea that they entirely break down goals and provisions of AIS 1.  As a result of incomparability, FS become unfair to its users and their decision-making abilities are not supported, or if ever FS is used, being misled.  For potential investors, they can be easily trapped in the inability of an entity’s FS to compare historically and against other entities which can be more eligible for investor’s resources.  If this happens, they cannot maximize their investments and also may loose their chance to help their communities through their corporations.  For current investors, they can be ensnared in sub-optimal promises and outlooks of the entity (e.g. sub-optimal within industry standards) due to incomparability.               It is also eminent that BT does include SICE explicitly together with other FS in the initial part of its FS.  Its SICE is rather located in the EN (p. 96) that is incompliance with format set forth by IAS 1.  IAS 1 requires entities to present SICE as a separate component of their FS and not as a negligible FS component ( 2006) that SICE should not be located in EN.  On the other hand, NTL have SICE in the location which BT failed to comply (pp. f9-f10).  It can be said that BT is hiding something which can cause negative impressions from current investors.  In their respective SICE, it is noticeable that their formats and contents vary which is an indication that comparability cannot be held and that one is not diligently coinciding with international standards.  In addition, both did not fulfill the need of the SICE results to reflect minority and equity holder interest which is against IAS 1.  Investors are uncertain on how much they have stake in both companies that can polish their holding gain targets.                   With regards to IAS 8, both companies complied with the provision that accounting policy being applied should be disclosed ( 2006).  For BT, it stated that it used Companies Act of 1985 (p. 72) while NTL disclosed US GAAP as basis for FS preparation (p. f12).  Although international standards are not applied by both companies, the mere fact that they made explicit the framework used in their FS is already compliance with IAS 8.  As a result, potential investors that is new to capital markets can get an accountant or analyst that is qualified in a certain accounting policy.  In addition, current investors will be aware if there are any changes in accounting policies which may require change of allocation decisions or hiring of capital market assistants.                      IAS 8 also set forth the limitations of managerial judgment in setting the entity’s accounting policies for certain accounts (2006).  The general limitation is that an entity can use managerial judgment if international standards, interpretations and recent pronouncements are lacking which means such kind of judgment is a mere last resource ( 2006).  However, BT prepared its FS for some accounts such as doubtful debts, long-term contracts and pension costs within managerial judgment without reference to either international or other local standards (p. 72).  This is especially true in accounting estimates.  In the contrary, BT disclosed the nature and amount of change of estimating certain accounts such as pension costs in EN               Managerial judgment should least be applied in material accounts and material accounts should not be encapsulated in aggregate items.  This is what IAS 8 is implicitly notifying concerned entities (IASB 2006).  But BT and NTL exercise managerial judgments to substantial accounts without even preventing the impression of manipulation from investors.  Such impression can deter motivation to invest funds due to the fear of sub-optimal returns even the company is at its “peak”.  When managerial judgment is excessive, accounting standards either international or local can be easily ignored because subjective biases of internal managers have a likely tendency for image and performance building.  In effect, the need of investors for fair FS is dimmed.                         The intention of BT in showing the consequences of changes in accounting estimates is clearly to guide investor decision-making especially current investors who analyze their allocation based on, say, previously determined market values of certain financial instruments.  In the contrary, BT presented and explained changes during 1999-2002 and the year in question is 2005 (p. 98).  Due to this, consolation to BT’s effort is only appropriate as investors would be provided by inferior data.  Investors are entitled to total disclosure because they are capital providers of the company.  However, with this win-loss scenario they are facing due to inability to gather sufficient information, their need to estimate the level of their expected wealth is not supported rather undermined.                   On the part of NTL, since it adopted a single-entity FS (e.g. all Group no Company/ subsidiary as opposed to BT), its accounting policy also departed from international standards.  As a result, excessive managerial judgment determined such consolidation.  Due to incompliance to IAS 8 regarding accounting polices, IAS 1 is also adversely affected.  In effect, the performance from the core/ major activities of the firm will not be determined by investors that may hinder analysis of the quality of stewardship of major position-holders within NTL.  Also, the use of accounting estimates is in accordance to US GAAP but this reference is a partial departure from international standards.  For example, changes in estimating pension plans do not have explanations on them (p. f37) like BT that means investors are not guided and complex computations and analysis are required.  The information needs of users are not achieved.               With regards to IAS 8 provision on disclosing and correcting errors through retrospection (2006), both companies exemplified compliance.  For example, FS of NTL and BT had conducted retrospection for its errors from 2003 through 2005  executed through restatements.  This is a far-reaching effort since IAS 8 only demands retrospection from the most immediate annual report (e.g. 2004 for both companies).  However, they included 2003 as well.  Such effort can increase the historical comparability of an entity’s performance which indicates that investors can forecast more accurately since the inputs of previous operations are adjusted to accounting policies of present and future transactions.                       In the contrary, both companies failed to disclose the nature of prior period error and the procedure used to correct such error (IASB 2006).  Such statements could be hiding in other pages which the author is unsuccessful to browse.  However, if the company would really want to disclose such information it would have included it in EN.  However, both of the companies merely stated that they have adjusted previous reports to coincide with the effects of present changes in accounting standards that they are using ().  As a result, investors are supplied with retrospective data without knowing why the operational implications of such changes.  It should be remembered that merely saying that their retrospection policy is consistent with authority regulations is a given fact and investors want elaboration.    Conclusions             The above analysis contains the most significant inconsistencies of BT and NTL’s accounting policies against international standards.  Small issues such as failure to split accounts especially in the BS or failure to change accounting terms (e.g. delete “net” from the bottom-line of IS) are not discussed.  The methodology behind this is the fact that both the 2005 Annual Reports of both companies being analyzed does not yet embrace IAS or other international standards.  For example, the 2006 Annual Report of BT includes IAS provisions because that year is its debut in adopting IFRS or by International Financial Reporting Standards.  The discussion merely wants to emphasize the implications to investors both potential and current of the inability of FS to embrace international standards.                As a conclusion, failure to use international standards such as IAS provisions makes an entity’s FS less useful to wide range of users.  FS based on some other accounting policies and subjective judgment cannot be used for comparability especially to global and well-known companies who already adopted IFRS.  This can lead to loss-loss situation for companies and investors.  The former cannot assure financing not because of inferior performance within the industry but primarily due in its failure to have comparable FS to the leader in such industry.  The latter cannot diversify the risk of its portfolio because it is concentrated to firms that have comparable FS.  As a result, there is a need for every growing and competitive firm to adopt IAS provisions to remain in such state or face the problems of internal funding.            Credit:ivythesis.typepad.com

A PAPER ON MANAGERIAL ACCOUNTING AND FINANCIAL REPORTING OF BRITISH TELECOMMUNICATION GROUP AND NTL

The Level of IAS Compliance of BT and NTL and Consequences on Users Introduction This paper aims to analyze and expand...

Marketing

Table of Contents                                                                          Section                                                                                   Page  Executive Summary                                                     1                                           Introduction                                                                               2                                           Objectives                                                                                 2 Background                                                                              3 Financial Side of Gross Margins                                           3 Marketing Side of Gross Margins                                          6 Trends and 2006 Assumptions                                              7 Recommendations and Conclusions                                     8 Bibliography                                                                             9   Executive Summary              This CEO report has found out that CPAL is more efficient, productive and profitable than CSACL.  This is related to arrive in a conclusion that the size of the fleet, number of workforce and flight destinations can be eclipsed by the ability of the firm to diversify internationally and concentrate to a specific market.  CPAL controlled its cost of goods sold particularly in depreciation and maintenance factors at a minimal level due to efficient and optimal utilization of its aircrafts.  It also controlled its sales revenues at a maximal level due to international diversification and serving the high-end market.  With this reasons, it is recommended for CPAL to continue its diversification, hedge fuel price escalations and remain its focus on the present market.         Introduction Gross margin shows how profitable a firm is (Investor words).  It is the difference between the total sales revenue minus cost of goods sold, or when expressed as percentage, further divided by the former ().  It is also used to measure the efficiency of a manufacturer and mark-up of a retailer (Money Chimp).  In aggregate, it quantifies both the income-generating capabilities of a firm as well as its cost-saving strategies and productivity programs.  With this respect, this presentation will deal on gross margin management of a particular firm listed in Hong Kong Stock Exchange, Cathay Pacific Airways Limited (CPAL).  This will be a CEO report and evaluation regarding aspects of CPAL gross margin management.    Objectives             Generally, the financial aims of managing gross margin are to determine how to minimize the cost of goods sold through scrutiny of the cost of producing and buying inputs, inventory looses and declined value of unsold inventories during a certain period (Superior Investor).  In the marketing side, it aims to establish a value-creating marketing mix that involves products, price, place, and promotion aspects to stimulate sales capability.  In this view, CPAL will be analyzed based on these key areas with benchmark for comparison being China Southern Airlines Company Limited (CSACL) which is a top/ major competitor ().  After the analysis, conclusions and recommendations will be drawn for testing the depth of the report and concretizing evaluations. Background             CPAL and CSACL are both competing in the aviation industry in Hong Kong although the later is considered the leading player in the region while the later is named as the largest in China ().  The size of CSACL, however, is undermined by CPAL’s capability to earn.  In 2004 records, CPAL has a total of .0 billion in sales which is .0 billion dollar short from CSACL.  Also, net sales favored the former at 0 million versus a loss million for the latter.  Only CSACL had excelled in year-on-year sales growth.  CPAL operated at a mere 90 global destinations compared to CSACL’s 540 routes including 435 domestic destinations ().  On the contrary, the former is a member of an alliance wherein British Airways and AMR’s American Airlines obtain membership.  Currently, the latter shrank its operations into 320 routes wherein 260 are domestic, 39 international and 20 within Hong Kong ().            Financial Side of Gross Margins     Table 1: Related Cost of Good Sold Items   2005 (in HK$ billions) 2004 (in HK$ billions) CPAL CSACL CPAL CSACL Flight Operations 28.2 18.6 23.4 10.0 Maintenance 4.5 4.4 3.7 3.3 Depreciation, Leasing, Servicing  5.5 9.7 (with amortization) 5.1 5.6 (with amortization)             As shown, the bigger number of employees (30,000 against 15,000), aircrafts (200 against 90) and destinations (300 against 90) being held by CSACL does not reflect to its cost of good sold as CPAL overtake most of major expenses.  Other factors may affect this scenario.    Table 2: Selected Factors that Affect Table 1 Figures   2005 2004 CPAL CSACL CPAL CSACL Revenue Passenger Kilometers  HK B HK B HK$ 57 B HK$ 36 B Passenger Load Factor 78.7% 70% 77.3% 69% Revenue Tonne Kilometers HK.8 B HK.9 B HK.4 B HK.4 B Tonne Load Factor 67% 63.3% 68.7% 62.6 Cargo and Mail Carried  1.1 M tonnes 775,000 tonnes 900,000 tonnes 545,000 tonnes Available Seat Kilometers 82 B 88.3 B 74 B 53.7 B Cost per Available Tonne Kilometer HK.19 HK.43 HK.07 HK.41 Aircraft Utilization 12.6 hours/ day 9.6 hours/ day 12 hours/ day 9.9 hours/ day             With the additional data, CPAL was able to overtake the expenditures of the bigger CSACL because it utilizes its passenger and cargo spaces more as reflected by load factors.  The passenger load factor is higher for CPAL despite CSACL having more available seat kilometers.  As a result, flight operation expenses rose partly due to additional flight attendants that are needed including more amenities inside CPAL’s aircrafts.  Also, relatively narrow spaces require increased ventilation and air-conditioning in which CSACL has lesser burden to face with.  And even though CPAL has higher cost per available tonne kilometers, it is paid-off by higher cargo and mail being carried and revenue tonne kilometers compared to CSACL.  The former also has higher aircraft utilization which means that its efficiency measures require additional expenditures in fuel, overtime work, etc.           By cross-referencing the first two tables, it suggested that even though CPAL uses its aircraft more frequently and derives more revenues by doing so than CSACL, their maintenance and depreciation expenses are rather non-distant.  Questions such as accident rate, expertise and diligence of employees, aircraft policies to passengers, among others are suspicious to CSACL.  High losses from wear and tear or lower aircraft space utilization from both passenger and cargo are non-reflective of CPAL.  Higher flight operations of CPAL which is at least 50% higher than CSACL is also rationalized by additional expense incurred in higher passenger and cargo load factor.  Lastly, CPAL has also good returns from its leasing contracts that makes lease payments headache free.     Table 3: The Revenue Side   2005 2004 CPAL CSACL CPAL CSACL Revenues (HK $) 50.9 B 36.7 B 42.7 B 23 B Gross Margin (HK $) 10.6 B (1.2 B) 8.9 B 0.872 M Gross Margin* (%) 20.8% (3%) 20.8% 3.7% * Note: Gross Margin / Revenues             This table shows how well CPAL converted its relatively high cost of good sold to positive cash flows.  On the other hand, CSACL (deceptively looking efficient in Table 1) has shown its lack of income generating capability.  Its lower expense may illustrate the gap of its internal organization and associates unlike CPAL which gained from its investment effectively.      Marketing Side of Gross Margins Table 4: Comparative 4Ps             CAPL CSACL Products Passenger Transportation, Catering, Aircraft Maintenance, Ground Handling, Cargo Carrier (CPAL Website) Passenger Transportation, Catering, Aircraft Maintenance (CSACL Website) Price More Expensive (Epinions) Less Expensive (Epinions) Place/ Distribution Channel Global Network Mostly Local in PRC Promotion Spent HK9 M in commissions Spent HK.5 B in promotions and sales               CAPL has been able to maximize the productivity of its aircrafts because of its global network. In fact, it is one of the founding members of One World Global that afford it to use over 600 destinations worldwide.  Also, it is a major stake holder in AHK Air Hong Kong Limited, an all cargo carrier, which serves the entire Asia.  These aspects, along with the presence of key associates, are what CSACL misses that resulted to minimal costs and minimal revenues at the same time despite of its size and prominence in the PRC.               Further, since Hong Kong is a commercial hub for international business transactions, CPAL benefits the income status of foreign passengers who are most likely prefer better service than better price.  In this view, its expensive fees and tickets are less intimidating for the specific market.  In the contrary, CSACL transports mostly in Chinese provinces and major cities that placed it within the cheap-waged workforce, thus, unable to increase revenues through better services since customers tend to be price sensitive.  In effect, it can only concentrate its resources and capabilities highly in being cost-effective with little product development or diversification.  In this reason also, CAPL is less pressured to promote its products and attach some lucrative incentives to stimulate demand.     Trends and 2006 Assumptions CPAL derived its highest operation expense and year-on-year increase in its fuel account at HK billion and 48.5% respectively with an aggregate flight operation expense at HK.2 billion (CPAL Website).  This makes its flight operations very expensive at times of oil price hikes and cited by the company to be a significant barometer of its future earnings ().  Since CPAL treats fuel factor as an external variable, efficiency can only be attained by maximizing the space of its aircrafts for both passenger and cargo.  As presented in the preceding discussions, it can be assumed that fuel prices has relatively less impact for minimizing the cost of goods sold by CPAL (refer to Table 2).    The capacity and breadth of its services is reflective on its hub presence, fleet growth rate, technology and partnerships.  It cannot stimulate its revenues without growing and upgrading its value chain.  At best, it cannot achieve integrated cost leadership and differentiation strategy which is cited as the most value-adding business strategy ( 2003).  To resolve these issues, CPAL intensifies its service flights in Los Angeles, London and Xiamen including additional services in Amsterdam, Beijing, Nagoya, Rome, Frankfurt, etc.  It also has pending deliveries for Boeing and Airbus aircrafts while it is the pioneering user of internet in global aviation industry.  In this view, including its code sharing feats and increasing membership in One World, it can be assumed that it can stimulate revenues and be efficient at the same time (all else equal).   Recommendations and Conclusions              1.  Being lean but mean, CPAL has been able to become Hong Kong’s premier airlines.  The key to this success is the type of market that it caters wherein its marketing mix can be easily and profitably controlled.  Also, with strategic alliances, it can minimize the risk and its associated cost of underutilizing its resources particularly aircrafts that can aggravate its resource depreciation and maintenance costs.  As a result, it is recommended that it should continue its global diversification to pinpoint the high-end portion of the market.  In this endeavor, however, it should caution its hub development and other operating forecasts against the socio-economic indicators of the country.               2.  Its diversification and increased service to selected destinations around the globe does not only increase its overhead cost but also maintenance particularly fuel costs.  Currency exchange risks should be hedged in order to minimize the impact of oil price escalation.  It can also use forward contracts in buying fuel wherein frequent demand will be the contract motivation since it has relatively greater aircraft use.              3.  It is also recommended for CPAL not to compete with the low-end market (e.g. competing in the provinces of PRC).  Lowering its prices especially in abrupt manner can imply decreased in service value.  Since this can happen when efficiency persists, it can divert the derived gains for expansion, replacing old aircraft models or increasing its stake in its good performing portfolio like its cargo services.  This recommendation is validated by the fact that CPAL has been recognized as “Airline of the Year 2005” by a UK-based research company (CPAL Website).  This means that the international market responded how well it deliver its services, thus, they feel the higher CPAL tickets and fees worthy for the derived satisfaction.   Bibliography   Credit:ivythesis.typepad.com

Marketing

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The truth behind Enron’s collapse

ACC3116 FINANCIAL ACCOUNTING THEORY             Executive Summary             The purpose of the report is to derive learning from the experience of Enron from the research and analysis of relevant literature that contributed to its demise.  The key theories that were considered are the efficient market hypothesis, information asymmetry and positive accounting theory.  It is found that voluntary disclosure of pertinent information to stakeholders and the public can provide the optimal shield for contemporary firms to prevent the fate of Enron.             Table of Contents   Table of Contents………………………………………………………………………2 1. Introduction…………………………………………………………………………..3 2. Efficient Market Hypothesis……………………………………………..……….. .3  3. Implications of EMH Failure to Capital Market Research……………………….6 4. Asymmetrical Information…………………………………………………………..8 5. Option Grants………………………………………………………………………10  6. Conclusion………………………………………………………………………….13 List of References…………………………………………………………………….14                            Introduction             Enron is already a history but contemporary firms can learn substantially from the mistakes its executives had committed which ultimately led to a sudden demise from the short-lived fame of its ground-breaking share performance.  This paper discusses several topics that directly and indirectly relates theories, studies and evidences to Enron’s collapse.  First, efficient market significance will be implied by discussing the reasons and effects of the failure to impound corporate factors to its share price.  This will guide the learning towards capital market research.  Second, the nature and role of information asymmetry to Enron’s demise will be explained.  Third, strategic actions of corporate executives will be evaluated using the positive accounting theory.  Lastly, conclusion is attached to highlight the learning and other relevant findings.             EMH             In a general analysis, there are some factors that should have affected the publicly-held share of a firm but are disregarded by its market price because market value are not exhaustive basis of firm performance.  According to 2006), this is tackled in US cases way back in the advent of Great depression in 1934 (see Chicago Corp. v. Munds) to contemporary valuation parameter disputes (see Weinberger v. UOP Inc.) ().  In the case of Enron, its complex financial structure is impounded in the share price because certain banks colluded in meeting the financial targets of the firm (2006).  These banks intensify the complexity of how Enron’s reports are prepared that tagged the former as “problem solvers”.  In effect, the efficient market hypothesis (EMH) semi-strong form () did not hold due to the fact that financial intermediaries that should have evaluated and restricted Enron in its doings are tolerated and even supported.  Thus, new information that should have change the decision of the market as well as the share price did not take place.                   Secondly, off-balance sheet (OBS) entities formed its part to distort share price as Enron misuse the good side of such legal provision which primarily aims to aid corporations to finance ventures (2002).  As a result, EHM strong-form did not emerged in share price adjustment due to insider agreements within the firm ().  If only Enron did not overuse the socio-economic spirit of OBS, the market may not erred in interpreting the corporation’s financial reports.  In fact, OBS gave Enron high rating evaluation from rating agencies ( 2002).  OBS entities are bounded for special purpose like access to capital and hedge risk available for Enron transforming its return on assets (ROA) and leverage looks excessively profitable and “on-boom”.  The company abused OBS opportunity that ultimately led to its removal and the introduction of more stringent GAAP codes and other related laws (2002).                         Perhaps, one of the biggest obstacles for EMH application (2003 ), the lack of disclosure of its financial and corporate reports helped Enron to skip from the market’s conservative analysis.  This is because Enron failed to explain to shareholders among others factors that may affect their stake in the company like the complex financial structure or excessive OBS entities.  These are methods and communications which do not have numerical/ financial equivalents that can suit to financial reports.  Nevertheless, the firm’s Annual Report should have reflected them but  (2002) commented in its 2000 Annual Report that the content had “spectacle presentation of characters and dialogs”.  In effect, users of such reports (ultimately, consists the market for the firm’s shares) had unknowingly disrupted semi-strong and strong EMH.  However, the weak-form have been excluded as excess returns earned based on financial data have no bearing ().                            The independent audit that should have been provided by the facility between Andersen and Enron also prevented EMH especially the weak-form as the inclusion of fundamental analysis can create excesses returns ().  The inability of the market to picture how auditors evaluated and authenticated Enron reports took them away from such analysis.  This situation would not greatly distort share price, however, collusion existed between the client and the auditor that led to third party certification that was limited to compromised agreements of both parties ( 2003).  As a result, even the semi-strong and strong EMH were adversely affected.  Obviously, the public including the shareholders did not have audit dependence hints and information that would have impeded price escalation of Enron’s stocks due to positive (although, misguided) future outlook.  One such evidence that proved the vitality of client-auditor independence was the declaration of Sarbanes-Oxley Act of 2002 (2005).  According to (2001), the restriction will offer investors with financial information from a publicly-listed firm that has reliability and integrity.    Implications of EMH Failure to Capital Market Research              The historic Great Depression and Enron collapse are two cases in two different times that proved that EMH failure will not be discovered and addressed until adverse effects to stakeholders are at peak.  This calls for a pro-active approach in conducting capital market research in which the endeavor should be infused even if obvious effects are yet to emerge.  The more stringent policies may defer and discourage Enron-like firms temporarily but pro-activity to determine the culprit (client alone) or culprits (client plus auditor) is conceded to have its strategic merits for capital suppliers.  Every potential and existing shareholders and creditors are now bound to get all the help they need from financial advisors, government and peers to secure their funds to entities that have at least a sprinkle of EMH or some degree of the weak-form.  Otherwise, their investment can be easily diluted by the market and/ or the entity without even imploring some contingent measures.  In simple terms, they will lose the battle without pulling out their swords and shields.               Being in chorus to the behavior of a certain financial market proved to be beneficial and less complicated for shareholders.  The case of Great Depression and Enron is not an everyday case while the general pulse of market participants is oftentimes correct and profitable.  However, there are several factors to consider when shareholders will completely give their trust and relate investment options to the capital markets.  For example, the efficiency of stock exchanges in which corporate shares is traded out of their traditional operations.  In economics, the role of the stock market is merely to provide a venue in which demanders and suppliers of capital can meet (1965).  Today, this venue becomes complicated due to brokers and traders, regulation from the government and involvement of foreign firms and investors as well as complexity and uncertainty of the environment.                For example, the London Stock Exchange had abolished Big Bang scheme that led to de-motivated independent brokers and conversely allowing entities to have their own dealers (1999).  In effect, the exchange can fail to limit the marketing campaigns private brokers can use to attract investors.  As Enron primarily utilized the lack of corporate disclosure and insider trading to obtain its objective, this situation can mimic the manipulative feature by misleading promises and bias advises.  In addition, the abolishment can hinder broker efforts (both private and independent) to seek markets diligently due to their “focused” clients that can ultimately limit the flow of capital in the economy.  Limiting the access to capital and interested borrower stimulates as well aggravates the inclination of firms to implement actions that continuously mitigate the functions and invisible hand of EMH.  Another Enron or perhaps Great Depression can follow in the coming years.  Asymmetrical Information               According to , asymmetrical information is a condition when one party in a transaction has a more substantial and relevant information than the other party.  In this case, it is likely that the former party will have higher bargaining power throughout the transaction until the latter discovers the error or default in the agreement.  When applied in the corporate setting, the theory of the separation of ownership and management can illustrate this case.  The theory states that investors have an indirect access to inside information with regards to the real corporate value compared to directly managing executives (2002).  As observed, investors can be applied with management tactics to raise self-vested interests of executives.  Traditionally, the latter opt to sell and issue shares when the firm is overvalued as well as the investors are unaware of such condition.  However, this dogma had long been discovered by the market.  as such, investors repel this executive behavior by revaluing their shares causing a negative market reaction.  In the end, the management could not maximize the traditional tactic due to unfolded information of its significance to investors.                 The supposedly first stage of the collapse of Enron was derived from Skilling drastic imposition of rigid and hostile retention scheme (2002).  This is a condition of moral hazard (1999).  Before  took the post of Division Manager, former employees have symmetric information with the firm regarding their worth.  However, when  tackled human resource issues, he tried to abort loyal but change-averse staffs with master-level and doctorate degree holders without full disclosure of the plan so that former staffs have adjusted their work ethics accordingly.  In a different case, the unethical accounting practice of Fastow and his collusion with  auditors is an information asymmetry under signaling (2002;1999).  The victims are the shareholders unknowingly handed by non-transparent corporate and financial reports.   and  signaled to each other about the hidden action which transformed shareholders as one having asymmetric data from the start of the contract.               Information asymmetry to employees was regarded as the first dark stages of Enron collapse because staff resistance to change is one of the top causes of failure of major corporate changes (2002).  Skilling, who had substantial experience as financial advisor, undermined human resources when it insisted to be hostile on them.  Without loyal employees, quality management is adversely affected because highly-qualified but new employees are neither capable nor motivated in conforming to the new methods under Skilling culture. This scenario may have been integrative-planned by  and  to limit the size of familiar employees to minimize their unethical exposure.  At this point, Enron was not looking strategically rather financially.  The incomplete information staffs would have been received (like the transition to highly-qualified and scholarly recruits) sparkled the negative atmosphere throughout the organization.  It ultimately impeded cultural cohesion and deepened the opportunity of higher executives to execute their self-vested practices.             On the other hand, information asymmetry to investors as well as rating agencies led to unguided substantial investments.  This formed the foundation for the fame and fortune of Enron to emerge.  Although signaling is primarily evident to investors that purchase stocks or those who increase their holdings under Andersen regime, moral hazard can be more appropriately tagged to initial investors of the company way back in 1980s.  The loophole of this practice by colluding parties, however, is that the huge amount of stakes that used to support the firm’s operations, stock attractiveness and continuity of the unethical practices made them very crucial to the existence of Enron.  As a result, when the scandal cropped up in the offing of the new millennium, the firm had faced not a gradual demise rather instant shutdown.    Option Grants Under opportunistic perspective, the economic incentives of Enron can vary depending if they opt to engage in fraud or take risks with regards issuing options.  The perspective is an accounting policy used by an organization that is based on manger’s incentives to increase their wealth; however, this will be shouldered by other parties within and beyond the organization ( 1997).  When they employ fraud, they can manipulate accounting methods providing a tampered profits and performance ratios.  According to the survey of  (1997), most managers are remunerated from the profits or ROA of their respective firms.  In effect, executives will not only impress employees to undergo option grants but as well impress the investors to provide higher incentives believing that the firm is doing well.    Further, (1987) showed that restrictive covenants formed by corporate debts are surmountable by fraud to improve accounting numbers.  The process will begin after executives have manipulated financial ratios permissible to the constraints of creditors.  In effect, the firm can enjoy strategic actions it cannot implore when the manipulation did not take place.  In return, the firm can implement strategies that will ultimately lead to profitability and growth in either prospective or actual sense.  When this information is delivered to employees, they will think that stock options are attractive investments.  They will purchase stocks unknowing that they are merely funding the efforts of executives to conceal mismanagement or possible bankruptcy.  As a result, executives are rewarded two-fold.  They can manage the firm with the support of creditors and implementing strategies with employees in full support due to the stock options the latter is currently holding.  The cover-up ultimately leads effective fraud on the part of executive whose incentives goes beyond remuneration rather long-term employment, promotion and fame within the industry.                         In a similar case, political groups can impede strategic actions of the firm if it reports high earnings or disclose issues pertaining to adverse external effects of their operations (1997).  The government may impose tax sanctions or legal remedies on tax evasion while environmental groups can boycott its products when informed about negative externalities (like oil spills).  These situations have their adverse impacts in both short-term and long-term existence of the company.  In effect, fraud to accounting methods can result to lack of disclosure and computational manipulation to arrive at a standard level of accounting reports.  This is why the study of  and  (1996) found that firms with environmental disclosures still used them for corporate image building.  As a result, similar to the benefits of corporate ability to bypass creditor restrictions, the firm can induce its strong business outlook to employees deepening the need of the later to resort to option grants.  Executives can distort the likelihood of disruptions from external actors from a major mental lapse in decision-making through designing accounting methods that can hinder such mistake.                   On the other hand, under efficiency perspective, the efficiency of the contracting parties or transactions at hand is pursued to end at a minimum agency cost.   According to  (1999) accounting alternatives are adopted by executives because it reflects the underlying and true performance of corporate assets ().  This makes fraud selection for executives ineffective, if not, legally impaired.  In this case, risk taking is the more strategic choice for executives to maximize their incentives.  For example, there are different methods to compute for depreciation or amortization.  When this will be related to stock options, executives have minimal control over the options due to the absence of fraud.  In effect, it is left to accept the repercussions of the market.  Although this is ambiguous making a less enthusiastic employee to involve their investment in options, this can be an effective mechanism keep employees and executives “unattached” to corporate performance.                Due to this, executives will not be pressured to take unethical accounting practices.  One incentive of this is that employees may see the worth of their executives that can induce corporate cohesion.  By doing so, executives can freely implement their strategies and run the organization more smoothly.  Though this, they can rip the benefits of fraud tactics through similar economic benefits plus the recognition they can derive from complimenting and idolizing employees.  They can extend affect their investment decision in the long-run which inevitably acquire employee’s trust.  By this time, executives can opt to apply fraudulent actions as they wish.  Another incentive is that accounting best practice can be awarded to the company by external actors as well as investors. In effect, executives can go away from unethical practices and manipulation that can minimize the costs of hiring additional skilled accountants and the cost of “greasing” to auditors, politicians and other colluding parties.    Conclusion               There are a number of learning contemporary firms should adapt from the experience of Enron.  One is of the most plausible learning is voluntary disclosure.  This can be the most problematic and confidential of all administrative tasks as it is directly related to strategy and structure a firm has.  The procedure can also aggravate the position of executives and the firm itself.  However, users of corporate information are not demanding the whole truth rather the relevant ones.  White lies do exist but abuse of this angelic-cloak to evil makes the cloak immaterial with regards to the excessiveness of evil.  As discussed in the earlier topic, stock price does not readily emit the effects of unethical accounting practice.  In effect, to prevent over-speculation and omission of EMH, the firm should disclose change in accounting policies for user reference not only for awards sake but for maintaining is strategic position in an efficient capital market.  Voluntary disclosure can also positively impact the distorting effects of information asymmetry to corporate results and relations.  Employees and shareholders can have some level of open communication with executives that can minimize resistance to change and support for growth and strategies.  Executives can be seen as good shepherds and would be awarded accordingly.  This admonition is reflected by the dual benefits of executives (that is, both monetary and non-monetary) when efficiency perspective is adapted as a strategic framework not merely on employee stock options but more importantly on managerial planning and implementation.                                                                                                                                                                           Credit:ivythesis.typepad.com

The truth behind Enron’s collapse

ACC3116 FINANCIAL ACCOUNTING THEORY Executive Summary The purpose of the report is to derive lear...