HI6025 Australian Financial Reporting Regulations Assessment Answer
Accounting theory and current issues
With businesses going global, now companies need to make their financial statement and records such that it could be read and understand by the end users globally. To have such effects many accounting standards are followed by the company to make their financial statements. Therefore, it’s a duty of an organization to identify the current regulatory framework of their country and encompass it while preparing their financial statements. In the report below, the current regulatory framework of Australia has been identified. Also it has been ascertained in the report whether the Australian Financial Standard Board of Australia is over regulated or not. In further report a case study on Harris Scarfe Holdings Limited is done and on basis of that fraud case many recommendations are given in respect of what further changes can be done in accounting reporting.
The organizations all around the globe follows the strict set of regulations and framework called reporting framework while formation of their financial reports and financial statements. These reporting structure follows the compliances and are in harmony with the recoding of finances of company. Australia too had various regulatory bodies to govern the system and called financial regulators which have their specific responsibilities. Some of these are Australian Prudential Regulation Authority, Australian Securities and Investment Commission and Reserve Bank of Australia. There responsibilities include prudential supervision, market integration responsibility and consumer satisfaction and regulating monetary policy of Australia respectively. In the following report, the discussion will be regarding the different regulating entities of Australia which includes identification of current regulatory framework and how they regulate the preparation of financial statements. All the regulations which needed to be followed strictly while formation of financial statements will be discussed here in detail. Following this, financial reporting environment of Australia and its regulation in context of some of the frauds in Australia will be discussed. A case of financial accounting fraud after 1990 and its implications on regulations will be discussed.
Current Regulatory Frameworks in Australia
The main function of any regulatory frameworks in country is to increase the transparency in the reporting and therefore strengthen the trust of investors and shareholders. In Australia as well, the current regulatory frameworks are set up so that their can be increased transparency while the preparation of financial statements by the various entities and in turn this can strengthen the trust of investors and they can make better and informed decisions (Peach, and Garg, 2019). A perfect harmony is set up on national and international level when company follows all the compliances and regulatory frameworks of government while reporting their finances.
Australian Securities and Investment Commission is the main regulatory body in Australia which at the end of financial year regulates the financial services and market of the country. The financial reports made by the company needs to be audited periodically which can be on annual basis. Certain exemptions are provided in certain special case wherein company if fulfil certain criteria are exempted from going through this periodical audit requirement.
Australian Accounting Standards Board has formulated some accounting standards which every company must follow. The standards provided by the Accounting Standard Board are to increase and strengthen the transparency while reporting and avoid any case of error or financial issues while recording of financial data and thus provides the legislative requirement for the company. As per Christ, Rao, and Burritt, 2019, Public or proprietary, all kind of entities needs to follow these standards set by the board. International Accounting Standard Board (IASB) which formulates the International Financial Reporting Standards (IFRS) also forms the basis for accounting standards in Australia. The companies which are operating within states and territories of Australia needs to follow all the policies formulated by the Australian Accounting Standard Board. The corporation Act, 2001 have some rules, regulations and listing regulations which companies listed under Australian Stock Exchange (ASX) needs to follow on periodic and continuous manner and also disclose all the matter related to listing regulations to the authorities. Firth, and Gounopoulos, 2017, states that the companies listed on the stock exchange must follow all the listing requirements of ASX in order to avoid penalties and punishments under the act. Since the investors and shareholders need to make major decisions on the basis of the financial reports they get, which can also affect the country’s economy, they must have full transparency and follows all the instructions and key points provided by the Australian Accounting Standard Board.
Over Regulation of Financial Reporting Environment of Australia
Confidence and integration of investors are the key factors financial reporting environment of Australia targets to achieve so that the investors keep investing money in the economy. And in order to boost that confidence and integration, transparency and disclosure of all the information of financials of company should be done. The end users, investors and shareholders are dependent on the transparent financial reports along with the fair and true financial statements and the Australian financial reporting framework ensures that all the listed company present this information in standard accurate format (Dumay and Hossain, 2019). Complex set of compliance programs are set upon by the financial reporting environment of Australia in order to strengthen the transparency and governance which needed to be strictly followed by the companies and closely monitored by the board. Different tiers have been set up by the Australian Accounting Standard Board to monitor the financial reporting of the companies and therefore, has created the over regulation through these compliance programs. There are two tier compliance program to monitor the financial reporting environment which are s follows:
1) TIER 1:
Directors of entities which reports under corporations’ act, 2001 are required to make statement of the compliance of the declaration. These entities come under TIER 1.
2) TIER 2:
Recognition and valuation methods of these entities remains same as that of tier 1 entities but the only difference is that they require less disclosure information (Stubbs, and Higgins, 2018).
There are several disclosures that the directors of companies need to make in order to follow the compliance program while preparing their financial statements and reports. The rules for the disclosure are as follows:
- Accounting Policy of company and its description in detail
- Certain uncertainties and judgement which are of significant nature
- Financial Report of company and its layout and format in detail
- Certain large amount of Transactions which are significant have a nature to alter the decision making of end users or investors.
- Certain third party association with company whose association can impact decisions of end users.
- Key transaction, balances and their reconciliation
These are the information’s which needs to be disclosed but there rae some information which companies need not to disclose and these are as below:
- Narrative record of company in detail
- Valuation Policies and measurement policies of company and their details
- Transactions supplementary to key transactions
- Audit fees of company
- Reconciliation statement of cash and its equivalent
- Interpretation of transactions
So these disclosure as per compliances programs are overriding the recording framework of nation at domestic level and are creating many hurdles for companies in Australia due to their complexity and tight corporate governance. The over governance and over regulation by the Australian Accounting Standard Board by Australian financial reporting framework on companies can be explained by an example.
A company in its financial statement records a fixed assets of property plant and machinery. Now as per the Australian Accounting Standard Board, Company should measure the assets as per the standards which are as follows
- In case of Tier 2: reconciliation of the fixed assets of the company are not required but the measurement policy while recognizing asset property, machinery and plants and its application should be disclosed.
- IN case of Tier 1: The reconciliation of fixed assets and the measurement policy and its application on property, plant and machinery, all should be disclosed in the financial statements and reports of the company.
On the basis of the given example, it can easily be deduced that on the basis of revenue generation, companies are bifurcated in two tiers and over regulated by the Board. Therefore, one can say that the Australian Financial Reporting Environment is overly regulated. Different accounting treatment and disclosure re done for the different cluster or tiers of company. O one can simply assume that if Company A comes in tier 1 entity, it requires to follow are the regulations and accounting standards along with all the disclosures to be made whereas in case of company B falling under tier 2, certain relaxations are there in disclosure policy but other than that company must follow all the accounting policies set up by the Australian Accounting Standard Board. It will cause the difference in financial statements of two companies as disclosure are recorded in the financial statements of the company. Since revenue generation is creating the bifurcation of entities, it has lead to the creation of confusion and chaos between companies and government bodies regarding their place in tier 1 and tier 2 entities and also because both the tier has different sets of policies which company needs to adopt. The process of reporting becomes complex and the understanding of financial policies which need to be adopted by company becomes difficult.
The other factor here is there are many financial regulators with different functions in financial statement in Australia. So the same financial report needs to be submitted to different boards who have different outlook regarding that same report and these these different boards need to verify the report as per their requirements. So the process become more and more complex. Hence, it can easily be deducted from these facts that the financial reporting environment in Australia is not only over regulated but complex as well. It is due to two rules being followed for preparation of statements and various verification points for same report.
Financial Accounting Fraud post 1990
Financial Reporting Accounting Frauds happen when company provides their stakeholders with the false or misleading disclosures in their financial statements through false information or data intentionally (Sharma, Pandey and Kumar, 2016). In simpler terms, company deliberately gives the wrong and misleading financial information to companies’ stakeholders who are key members to make decisions regarding company. For the purpose of analysis, popular case of – Harris Scarfe Holdings Limited (Authority, 2016) as real life fraud case is taken into account. It has been found after analysing that the financial statements of the company contain many misleading information which leads shareholders to make decisions. The analysis also pin point the cause of the conflicts which is the gap between expectation and reality. As a result, the auditors independence and governance structure of corporate got affected and harmed. This issue highlights the fact that companies must and should follow the accounting standards set up by the Australian Accounting Standard Board.
i) Case key facts summary:
As per the case, government charged the company with manipulation of information and giving out wrong and misleading reports and results. The company in turn prosecuted a key manager for recording the false entries over the years. It is due for notice that the false entries and recordings has lead to misleading, monthly, quarterly and annual information and records and hence affected the ASX listing of company. Also another manager was charged to publicize wrong liabilities of directors’ duties. The Australian Accounting Standard Board stated that wrong financial statements and reports causes the wrong decision making among the shareholders and also states that the chairman wanted shareholders to buy shares by providing wrong information of company.
ii) Positive Accounting Theory:
The nature of accountants and managers involved with financing are non opportunistic and they are the ones primarily responsible for the accounting policies of the company. Most of the accountants do not favour the accounting standards issued by the Australian Accounting Standard Board, but favour the traditional way of accounting. It has been because of 3 reasons:
- Modified and Qualified opinion of auditor occurs due to change
- More staff training, updated software and increased audit fee results due to change
- Many non managerial persons become suspicious and therefore the welfare of agents involved in financial reporting can be affected.
As per Alali, Sophia, and Wang, 2017, the availability of many accounting practices can increase the efficiency of reporting by the managers as they now have the flexibility to choose among the options. Since, it depends on the perception of managers and accountants which accounting standard they find more attractive or easy or efficient, they choose one which have their best interests and more effective as per them.
Three hypotheses are proposed on basis of manager’s choice to choose an accounting principle which are 1) The bonus plan hypotheses 2) The debt covenant hypothesis
According to hypothesis, many managers against the interest of company, plan to maximise their own profit (Bonus Plan Hypothesis) by using more accounting procedures (political cost hypothesis) and useless conservative procedures (debt to equity hypothesis).
Australian Securities and Investment Commission charged the chairman of Harris Scarfe Holdings Limited, to falsify the entries for continue 5 years in their books. The executive chairman of company was charged with the changing in director’s responsibilities.
iii) Accounting Regulations by Harris Scarfe Holdings Limited
In case of Harris Scarfe Holdings Limited, the Australian Securities and Investment Commission found CFO of company guilty of manipulating the financial statements of the company and falsifying the shown profits which in turn influenced the decisions of shareholders and stakeholders of company. The increased profits were shown in the monthly, quarterly, semi annual and annual reports of the company which was a manipulation on the company’s and its group company’s part. Director’s statement along with the financial reports are filed with ASX on continuous basis. According to Carmichael, 2020, it has also been found that the executive chairman of the company was publicizing the misleading and wrong duties of directors which also affected the decision of end users. So as per the hypothesis given above, the CFO of Company was using misleading accounting procedures (Political Cost Hypothesis) by using conservative procedures (Debt to Equity hypotheses) to increases his own benefits (Bonus Plan Hypothesis) instead of interest of shareholders and end users of company.
iv) Valuable Lessons learned from case
There are many lessons to be learned from above fraud case of Harris Scarfe Holdings Limited among various entities and financial regulators. For the company lesson learned involves the internal audit. Every company must have proper, transparent and well organized internal audit system to find any kind of mistake, errors or issue in early stages and reduce the chances of fraud (Zetzsche, Buckley, Barberis, and Arner, 2017). For the Financial regulators, they should know that there should be the uniformity in the financial statements of the company presented over the period of time. Proper disclosure should be made in case of change in accounting procedure in the financial records of the company. These disclosures make sure that the end users make informed and decisions regarding the welfare of company and its resources. The regulators of the country should also ensure that there is proper training between the end users about how to read and understand the financial statements and records of the company and how to use them to make the decisions.
v) Recommendations for the Financial regulators
On the basis of the fraud case two recommendations are given by the Australian Financial Standard Board of Australia.
- The regulators will make sure to divide the boards of company in different teams which are responsible for the formation of different policies and and different functions within the company. Every team will have specific responsibility and will make sure that there is uniformity in the policy and the decisions taken are controlled (Mills, 2018).
- The second recommendation by the board is to make different boards for the one to make accounting policies and one who is responsible for the disclosure of the information.
The conclusion on the basis of the fraud case is that the managers and accountants of the company were taking undue advantage of the different policies of government and using these policies to falsely record increased profits of company which in turn affected the decision s of end users. This case made board understand that there should be the uniformity in the accounting policies for all the entities. As per Beck, Dumay, and Frost, 2017, the other point which came in light is that there should be internal review by company as well as by the government over the policies and financial records. Also there should be harmonization in company’s reporting framework.