Case: Tread Lightly through These Accounting Minefields (critical essay)
Read the Tread Lightly through These Accounting Minefields case study. This case addresses the different ways that companies choose to deal with the pressure created by an ever-changing economic climate. For example, managers are pressured to report sales growth figures that meet investor expectations, which can result in companies issuing misleading, and even fraudulent, financial reports. The case identifies six "minefields" where accounting abuse can take place: revenue measurement and recognition, provisions and reserves for uncertain future events or costs, asset valuation (and overvaluation), derivatives, related-party transactions, and information used for benchmarking performance.
Requirements:
• The case includes questions at the end of each accounting minefield section. Write a 5- to 6-page paper that addresses how these questions relate to the case.
MINEFIELD 1 Revenue Measurement and Recognition
Shareholders who want to avoid the same fate should pass along these ques-tions to the board audit committee:
• How is revenue defined? And what event triggers its recognition?
• Does this present a reasonable measure of the revenue earned by the business during the reporting period? Is it consistent with revenue measures used by domestic and global competitors? And is it clearly described in the financial statement footnotes?
• If revenue is measured in an unusual or new way, is that disclosed? Is the approach justified in terms of its risks and advantages?
MINEFIELD 2 Provisions for Uncertain Future Costs
To discover if a company is wandering into one of these minefields, ask these pointed questions:
• Are estimates for uncertain events (such as doubtful accounts and restructuring reserves) included in the financial statements?
• Do the financial statements present a reasonable measure of current period operating expenses and revenues, with sufficient disclosure in the footnotes of these estimates and the accounting treatment?
• Should gains and losses included in comprehensive income (foreign currency, investment gains and losses) and in the footnotes instead be included in the current period's net income?
MINEFIELD 3 Asset Valuation
A board member at Elan would have done well to ask whether the accounting prac¬tices being used by an otherwise strong company really provided a more com-plete earnings picture for shareholders. In the same spirit, you should ask the following:
• Do tangible and intangible asset val¬ues and write-downs of assets reflect real values and changes in value during the current period?
• Are these value adjustments fully disclosed?
• Is the accounting treatment consis-tent with industry and global com-petitors? If not, are the differences justifiable and adequately discussed in the financial statements?
MINEFIELD 4 Derivatives
To avoid presenting information that may lead to erroneous conclusions and faulty val-uations, investors and their representa-tives on boards should ask the following questions:
• Are all significant related-party trans-actions and commitments disclosed?
• What policy determines which trans-actions will be disclosed and what level of detail will be included in the financial statements?
• Are there conflicts of interest that could damage or benefit specific groups of shareholders that should be disclosed?
MINEFIELD6 Information Used for Benchmarking Performance
To serve those interests, it's reasonable to expect board members to ask:
• Are there aspects of the accounting methods used that may cause invest-ors, security analysts, compensation committees of the board, or others to under- or overassess the business's financial performance during the current reporting period?
• Are there differences between the company's financial reports and its competitors' that need to be disclosed?
• Include suggestions for what can be done to minimize the impacts of such activities on the financial statements (the impact is always there, but we attempt as auditors, whether internal or external, to reduce the effect to an Immaterial level).
Your paper should meet the following:
• 5 to 6 pages in length, not including title and reference pages
• Include at least 3 credible outside reference sources
Reference for this Critical Thinking Assignment:
•Sherman, H.D., & Young, S.D. (2001). Tread lightly through these accounting minefields. Harvard Business Review, 79(7), 129-135.
Attachment:- Tread Lightly through These Accounting Minefields-Case (1).rar