Australian Financial Reporting Regulations: A Critical Review Assessment Answer
Accounting Theory and Current Issues
Accounting reporting is a very important aspect of an organization, especially such firms that are small in size. Therefore, we intend to discuss various key accounting agencies and standards boards that are responsible for regulating the financial reporting of Australian. The corporation that is operating in the country has been determined its accounting statements that are preparing financial statements of the company. However, we have also analyzed the current regulatory framework those are constantly working with the motive to maintain the accuracy of its statements within Australia. Apart from this, the importance of Australian financial reporting on the different corporations is also being a vital part of these reports that have assisted in increasing the transparency of the accounting bookkeeping. We have supported the discussed with the use of various theories that are already published by the scholar as well as authors are also being the essential part of this research. However, the accounting fraud that is associated with the companies is needed to be examined so that further complications could be avoided in the future reporting process. By this, we mean all small or large size organization need to determine its accuracy level while preparing the financial statements can assist in the overall growth of the company in future success. Furthermore, this report has assisted us to reach a specific solution that can control the accounting frauds effectively. Henceforth, it can also increase confidence among me and my entire team to take specific decisions that could be useful for the future analysis of the accounting statements.
In the current business scenario, most of the companies are having some kind of accounting issues while recording their day-to-day business transactions. It can create a huge impact on the overall growth and development of the company. Therefore, the account manager needs to have an advanced accounting system that can assist in the successful attainment of its individual as well as organization goal. It has been seen that accounting is a systematic process of recording financial data that are related to the business (Freeman and et.al., 2014). It could be backed-up with certain accounting theories and practices so that accuracy of the records could be maintained effectively at the time of recording the transactions. Therefore, this project intends to highlight specific information regarding the current regulatory framework of Australia that is used in the reporting process. Apart from this, the relevance of the financial reporting environment can also be determined by taking into account various scholars’ points of view. Furthermore, one real-life financial reporting fraud has been the key part of this report.
1. Current regulatory framework of Australia
AASB (Australian Accounting Standards Board) has provided specific rules and regulations that can be useful for large or small firms to record their various financial transactions systematically. The primary purpose of this board is to develop as well as maintain high-quality financial reporting rules for each sector of the Australia economy that help develop international financial reporting standards. It has been determined that Australia is focused on promoting shareholders' confidence as well as integrity within the growth of the economy, organization, and the capital markets (Macuda, Matuszak and Różańska, 2015). Being an independent accounting body they must be applied to every other common goal that is related to the financial reports of both public and private sector reporting firms. In general, the financial statements that are associated with the accounting standards must present a fair and accurate financial position of an organization.
The objective of preparing the financial statements such as income statement, balance sheet, cash flow, and equity shareholder report needs to be aligned with the Australian accounting standards (AAS). It is responsible for measuring the financial statements as well as prepares notes of the corporation that are complying with the IFRS. According to the auditor’s point of view, the financial statements must follow the specific rules and regulations that are set as per the IFRS standards. The AASB 1039 is primarily associated with the preparation of financial reports of the company. It has also guided all the ASX listed companies to produce a well-organized common purpose financial statement concerning the AASB accounting regulations (McLellan, 2014). However, AASB 1053 applies to the different reporting standards that include two tiers of reporting needs for preparing any financial statements of an organization. It can be further determined by taken close analysis of the below-mentioned various financial statements.
Income statements: It happens to be the utmost important financial statements that provide crucial information regarding the total profit and losses an organization is generating during the time. The key purposes of AASB are to apply specific standards to assist the users to understand its position as well as performance. Moreover, AASB 101 helps the management to determine the errors as well as misleading risk users generally faced while recording the transactions into its profit & loss statements.
Balance sheet: In an accounting term, a balance sheet is considered as the final report of the company that represents its overall health position. It consists of assets and liabilities that are carrying by the firm within its daily business operation. According to AAS 10, liability can be recognized within the balance sheet at the time it is probable to the outflow of the resources should provide maximum benefit to the firms. Similarly, an asset could be recognized when it can generate a certain cost to the company in the future as well as measured reliably (Fuhong, 2012).
Cash flow statement: According to the AASB 107, it requires the overall provision of data regarding the changes occurred in the cash or cash equivalent of an organization while preparing a cash flow report. The accountant needs to analyze the different activities such as operating, investing, and financing before recording into the final report. The regulations are strictly followed by different entities that are prescribed by the AAS.
Thus, reporting firms need to be liable to expect the presence of their users those entirely depend on the overall financial statements for the data that would be valuable to the firm. Therefore, the accounting firms need to make use of various accounting standards such as AS4, AS5, AS6, AS21, and AS23. These standards are tending to be effectively valuable for the Australian firms before recording their business transaction. It should also be useful for the account manager while preparing specific financial statements so that the chances of mistakes and risks could be avoided in the future.
2. Review regarding the Australian accounting regulations
According to AASB, I can strongly say that the companies that are operating in Australia are needed to prepare as well as file financial reports with ASIC at the end of the accounting period. It has been seen that the Australian accounting standards are quite balanced for the entities so that they can prepare their financial statements more efficiently. I have able to found that it can offer a wide range of facilities and regulations to the large or small firms to record their financial data accurately into various statements so that future accounting-related mistakes could be avoided (Shouhua and Chunhua, 2012). However, it has been analyzed that the Australia environment has a wide disclosure regime as per various financial reporting needs that are set as per the type of organization. Disclosing firms that have listed on securities as well as have certain shares as an outcome of regulation is needed to be followed effectively. The annual financial statements might be formulated by almost every organization except for small proprietary industries. The yearly records include balance sheet, profit & loss statements, and cash flow statements.
According to AAS reports, the companies have to prepare their financial reports under the specific regulations that are made by the corporation law. The regulation evenly provides maximum supports to the industry to maintain transparency in their accounting records so that further complications and a mistake could be avoided. However, the growth of AASB-series rules tends to provide a multi-step process that consists of a public consultation procedure in which the key firms have the right to use the policies and guidelines that are effectively helpful during the preparation of financial statements (DeMott, 2012). In my opinion, these regulations do influence everyone, because the AASB objectives are quite clear to remove the capability to prepare the financial statements that provide compliance with the AAS. Some of the large firms like KPMG are using SPFS for their future accounting safety that required to make proper disclosure regarding the standards those are set with the motive to increase the accuracy standards of the financial reporting system.
In the opinion of Guthrie and Pang, (2013), AAS is considered as primary implemented based on IFRS standards that have been created to cater the accounting reporting of the listed entities as well as other operating agencies at the international capital market. Therefore, it is important to have clear and strict rules that can provide maximum control and safety to the company’s financial reports from getting affected. The accountant needs to follow each sector, standards, and acts that are set by the AASB for the smooth management of their reporting systems (AASB, 2014). These rules and regulations have created a pleasant environment within Australia so that every organization should get benefits from it’s for a long time. In recent times, a 2 tier accounting framework for the GPFS has been also introduced that enables the specific requirements of AAS. However, the AASB has only one tier system that relies on IFRS standards. After going to those the various accounting standards and regulations, I have come to know that if a person is a highly qualified accountant in context with the Australian accounting standards, then only they need to have such type of demand.
Greenberg and Cunningham, (2013), state that the AASB recently is undertaking a program that can help to balance the needs of AAS through the specific needs of accounting guidelines that are made by the IASC. It has been decided with the motive to check the accuracy level of the financial statements more efficiently because the IASC tends to offer a lot more alternatives to accounting treatments as well as the disclosure approaches. However, in the case of AASB, it generally permits single treatment or methods to regulate their financial reports within Australia. Therefore, it has been examined that AASB is done a remarkably good job in control the day to day activities of the company by changing new policies and standards. It can create a positive environment for the entire organization in Australia.
3. Real-life financial reporting accounting fraud
Accounting fraud is a global complication of financial statements to develop a false appearance of any corporate financial position. It consists of an employee, finance manager, and organization that is misleading their stakeholders. For example, AIG (American International Group) Inc is a global leader in the insurance as well as a financial segment. It is situated in the NY city as well as operates in more than 130 nations. However, it would involve a primary activity that consists of general and life insurances.
In the year 2015, it has found that AIG Inc is found to be involved in a massive accounting fraud scandal that results in almost $3.9 billion losses to the company. At that particular time, CEO Hank Greenberg was responsible for the strategies and decision-making that is needed to manage their operations effectively. The investigation was under the control of the security and exchange commission of the US. It has been determined that the alleges AIG is engaged in misleading accounting as well as financial reporting data which is estimating an unduly positive image of AIG’s overall underwriting performance for investing in the public market. Specifically, they are involved in two sham insurance transactions that were given investors the right outcome regarding the company reserves for claims that it was supposed to do. After examined the facts the court has decided to settle the claim with more than $1.6 billion for the allegation related to the inefficient accounting practices (Giroux, 2013).
Positive Accounting Theory’s
It happens to be an intention to examine and estimate the selection of accounting policies across the various firms and corporate business. It tends to recognize that economies various consequences that arise during any accounting complications. By PAT, there is always a requirement of efficient accounting systems thus, AIG Inc would help to reduce the cost related to the concern guidelines. These are simply based on the certain observation that has been examined during the time of analyzing the accounting transactions of the insurer. However, it intends to be a branch of accounting research that seeks to determine the actual accounting practices that are associated with AIG Inc (Bratton and Levitin, 2012). A large chunk of the insured CDOs that came in the form of wide mortgages, through the minimum tranches comprised of a subprime loan. The recording of the transaction has not been made as per the standard procedure that has resulted in misleading the statements. Thus, AIG Inc believes that the defaults on these accounting frauds would have an insignificant impact on the performance of the company. Therefore, it is important to conduct an efficient internal audit that can help the firms to determine the actual reason for the downfall. It has created a huge implication on the AIG’s reserves that were reported less than the actual estimation. It has also been recommended that accounting theory and standards rules can assist them to develop new practices and procedures that can help in controlling these types of frauds. The reason behind is the qualitative nature that reflects the overall financial performance of the company.
Specific accounting regulations were violated
According to the entire scandal analysis, it has been determined that the investors were alleged that there are various accounting problems such as deposit as well as reinsurance accounting, and statutory reporting issues were associated with the company. The court has noticed that the pleading needs of the primary accounting violation as well as culpability following the GAAS (General accepted accounting standards). However, AIG recognized that its economic base was inefficient in analyzing the accounting risk, as well as the magnitude of misleading risk, which is also not under the control of the finance departments. According to section 11, it has created a well potential debt irrespective of the accountant that has failed to prepare the financial statements by following the GAAP principle. The plaintiff would have made well-pleaded allegations that a financial manager has signed off on the accounting statements due to the violation of GAAP principles as well as primary misleading to the other investors. However, it has been disposed of the specific claims at the given motion to concern violation because the plaintiff shareholder had reliably alleged with the AIGs statements violated the GAAP principles as well as misleading the accounting records (Bond, Govendir and Wells, 2016). Apart from this, section 10(b) also claims for the violation of the false statement. The plaintiff has brought the claims under section 11 of the security acts that offer a private right of actions for any shareholders who are buying the funds from the AIGs Corporation.
Throughout the entire accounting fraud analysis, it has been found that AIGs Inc has set a standard for the other agencies to check the accuracy of their accounting records before posting them into the final statements. The misleading problems can impact the entire corporation as well as the concerned parties badly in the future administration. Thus, it is quite helpful for the other reporting entity to take serious outcomes from this scandal. The case has changed the entire scenario of the financial reporting system specifically the reporting entity of the US. The FASB has transformed new policies and standards that can be further helpful for the other corporation to effectively manage its accounting systems. However, IASB has also provided a certain framework to assist and guide the large business firms by creating new standards concerning assist the finance manager of AIGs. Therefore, the accountant needs to follow the standards while dealing with the misleading problems that are not explicitly dealt with the reporting regulation. Although, FASB has also been derived its rule to set an accounting standard from the incident of AIG’s Inc. The objective of the FASB reporting entity is to establish as well as improve the financial reporting system to provide a lawful decision to concern shareholders of the company at the time of reporting. Similarly, the regulation of the US has the maximum controlling right over the financial systems for ensuring a systematic procedure of accounting records that are followed within an organization. Thus, the regulators need to manage their financial reporting system consistently so that the chances of mistakes could not have occurred in the future.
Recommendation to improve accounting fraud in Australia
For any organization, whether small or large they are always surrounded by some kind of vulnerability or fraud. It can impact the entire business operations or sometimes lead to creating a huge loss to the company. Thus, these types of accounting frauds need to be analyzed by the firms closely. However, it has been examined that the firms that are involved in this type of fraud is needed to be aware of various factors such as employee relationship, lack of formal oversights as well as the financial implication that can influence the large firm's cash position. Thus, it is vital to identify and take serious action before it can damage the internal financial strength of the company. Therefore, a certain recommendation is required to be followed to avoid further complications.
- Segregate accounting duties: Because of the size, plenty of firms in Australia have one individual that always handles their bookkeeping operation such as processing customer payment, receivables, paying invoices, and recoding various transactions. It tends to make little easy for cases of fraud to be unnoticed. Therefore, these firms need to be having multiple people that can handle the work efficiently so that chances of fraud could be avoided.
- Maintain internal control: The large organization tends to have a wide range of activities to be formed regularly. It could restrict access to accounting data, payroll functions, and inventory access. Therefore, the management needs to apply positive theory and standardized accounting systems that can control the internal operations effectively.
From the entire project report, it has been concluded that accounting is one of the important aspects of an organization. It can assist a firm to follow specific rules and regulations that are set by the regulatory bodies of a respective country. However, it has been seen the without having a proper financial reporting system that chances of fraud have been high in some cases, Therefore, the management needs to adopt advance accounting policies and standards that can help them to manage their regular business transaction quite safely.