Accounting Quality

Accounting Quality

Q1. Assess the roles of the Board of Directors and Chief Executive Officer of a public company for establishing an ethical environment that generates quality accounting and reliable financial reporting for use by shareholders and investors. Provide support for your assessment.

Under section 32 of this Act, the Sarbanes-Oxley Act (SOX) has put in place some requirements that must be met by publicly trading companies. The title of this section is internal controls. One of these requirements is that all public companies must put in place mechanisms that are supposed to ensure accurate disclosures of finances of public enterprises (Shakespeare, 2008). It assumes that people who are responsible for a company’s finances must be aware of the consequences that may follow them if they give false information to the public. A company’s financial officers must ensure that whatever they are appending their signatures on, as long as it has monetary value, may come to haunt them if it were wrong information (Shakespeare, 2008).  It is, therefore, upon the signatories to ensure that they have accurate data concerning a company’s financial standing from the parent company and the subsidiaries of the company. The idea of holding the managers of subsidiaries responsible will be dealt with at the enterprise level through the internal controls established by the firm. It is, therefore, upon the business to ensure that whatever people it has assigned strategic positions are responsible. Under section 303, nobody is allowed to coerce or force his juniors to come up with financial figures that are not accurate (Kohn, Kohn & Colapinto, 2004). If there is an external influence on how the financial records of the firm should be made, then the person doing the influencing should be handled according to the law. It was seen that people in senior positions were influencing the juniors to come up with cooked figures that showed that the company was doing well when the opposite was the truth. Section 404 deals with mechanisms that can be used to test the effectiveness of internal controls ( Kohn & Colapinto, 2004). It was seen that some internal controls could be weak and as such, they could be influenced by other people from the external world. A mechanism had to be put in place to ensure that the internal controls were working effectively. To support this argument, some companies may put in place mechanisms that are weak and anybody can influence them to bend the law in their financial reporting. When the above sections of SOX are followed, the investors are likely to get a report that is very accurate and reliable.

Q2. Recommend a strategy for a CEO to implement, leading to an ethical environment that leads to high-quality accounting, reporting, and forecasting. Provide support for your recommendation.

The CEO of a company can use several strategies to ensure that there is quality accounting in his firm. One of the strategies is by following all the recommendations of the SOX requirements (Albetch, Stice & Stice, 2007). When the requirements of SOX are applied to the later, mechanisms like internal controls will be put in place to ensure that whatever is being reported concerning finances is the truth only. The SOX guidelines will have to show people the consequences that they are likely to face if they report knowingly what they know to be wrong. It will, therefore, mean that before any disclosures are made, the CEO must cross-check and verify the authenticity of the information that he is releasing to the public. The CEO and the Chief financial officer are required to endorse any financial report that is made that pertains the financial statements of the firm. Another strategy will involve banning loans to the CEOs and other directors of the firm from the finances of the company (Albetch et al. 2007). It has been discovered that these insider loans were usually being hidden from the public, and the public could have thought that all was well when the opposite was the truth. To support, this argument it should be known when the directors of a firm are allowed to take money from the firm as loans, there is no guarantee that the money would be paid back in full. These people can manipulate books to show that they have paid when in the actual sense they have not paid. Developing and enforcing an officer’s code of ethics is another strategy that can be used by CEOs to ensure that there is quality accounting in the firm (Albetch et al. 2007). The code of ethics will guide those in charge of accounting to follow the required laws when preparing their books of accounts. Giving strong support to the audit committee of the company will also go a long way in ensuring that the auditors carry out their work effectively and efficiently.

Q3. Suggest how corporate management can provide assurances to investors that the performance forecast and expected earnings will be realized, minimizing the volatility of the stock price. Provide support for your suggestions.

The corporate management can use several ways to give assurances to the investors that all is well in the firm. One of these methods is by releasing corporate disclosures that show the performance of the company (Healy & Palepu, 2001). When corporate disclosures are made, it gives the investors an insight on how their funds are being used or the general performance of their company. It is one of the ways that will be used to give the investors assurances that all is well with their firm. The management can use several ways to give corporate disclosures to the public. Some of these ways include corporate discussions that are aired on the media, releasing financial statements and financial reports and voluntary communication about the financial standing of the firm (Healy & Palepu, 2001). Using the internet sites like social media to post the performance of the firm is also another strategy that firms can use to communicate to the shareholders what could be taking place in their firm.  It should be seen as the public would be following these discussions keenly, they are likely to know the financial footing of their company. To support this argument, it should be known that managers who are not scared of how their firms are doing will not be scared of sharing the performance of their firms with anybody. It shows that they are proud of how their firms are performing, and that is why they can share their success stories at the slightest provocations.

Q4. Evaluate the consequences to a publically traded company when there is a lack of quality within financial accounting and reporting, indicating how these consequences may be minimized. Provide support for your answer.

When a publicly listed company engages in financial reporting that does not meet the required standards, the consequences are dire. In the first place, investors may decide to withdraw their shares from such a firm leading to its collapse. When such a firm collapses, it means the top management have a case to answer. They may be hauled from one courtroom to another to respond to the questions that are related to the collapse of the firm. The process of litigation is a very costly affair to both the accused and the accuser. It will, therefore, be seen that a lot of money would be spent in a very unnecessary manner. Another consequence would be a lack of trust on the side of people involved in the financial accounting. Such people may be blacklisted for several years by authorities for misleading the public about the financial position of a given firm. These consequences can be avoided if there is strict adherence to the law of accounting. People who are in charge of accounting should ensure that they report the truth. The reason here is that they would be held responsible for any misconduct that they condone at their firms. To support this notion, when the Enron saga was brought to light, the accounting firm was forced to close shop for it took part in defrauding the public. The accounting firm had been in charge of auditing Enron’s books for long, and it knew that whatever it was doing was wrong. In addition to being dragged to the courts, the accounting firm also had to go. 

Q5. Assess the requirements of the Sarbanes-Oxley Act related to accounting quality, indicating whether or not you believe the requirements are sufficient to protect stockholders and potential investors. Provide support for your position.

The requirements of the SOX that are related to accounting quality include the disclosure controls, the improper influence on conduct audits and the assessment of internal controls. The disclosure controls are designed to ensure that what is disclosed is the actual figure and not cooked up figures (Jackson & Fogarty, 2006). A firm is supposed to put in place mechanisms that would ensure that what is being reported is the truth. The reporting officers must crosscheck and verify that whatever they are reporting is the truth. In so doing, the person disclosing the financial statement of a firm is sure that whatever he is reporting is the truth and not cooked up figures. The improper influence controls ensure that there is no influence on what is being reported (Jackson & Fogarty, 2006). The person doing the disclosures discloses what is right and that which has not been interfered with by anybody. The assessment of the internal controls is made to ensure that the internal controls put in place by the firms are beyond reproach and that they would produce reliable information. Personally, I believe that these requirements are sufficient to protect stakeholders and other investors from unscrupulous managers. What should be done is to make more additions to these requirements so that they can be better. To support this argument, it will be seen that many of the public firms that went under did not have mechanisms that would be used to put controls on how they disclosed their finances. These companies did not even have mechanisms that were used to verify whether the information that was being disclosed was true or not. It can also be seen that managers of many of these firms influenced the manner of preparing the financial disclosures. Those who were supposed to make financial statements were compromised and in so doing, they gave wrong figures. Had there been ways of ensuring that what was being reported was the truth, these firms may not have gone under.

References

Albertch, S.W., Stice, E.K., Stice, J.D. (2007)  Financial Accounting. New York. Cengage Learning

Healy, P.M., Palepu, K. G. (2001). “Information Asymmetry, Corporate Disclosure and the Capital Markets: A Review of The Empirical Disclosure Literature” Journal of Accounting and Economics 31:405-440

Jackson, P.M., Fogarty, T.E. (2006) Sarbanes-Oxley and Non-Profit Management Skills, Techniques and Methods. New York. John Wiley and Sons

Kohn, S.M., Kohn, M.D., Colapinto, D.K. (2004)  Whistleblower Law: A Guide to Legal Protections for Corporate Employees.New York. Praeger Publishers

Shakespeare, C. (2008) “ Sarbanes-Oxy Act of 2002 five years on: What Have We Learned?” Journal of Business Law and Technology 333