In the modern business environment, firms need to follow the generally accepted accounting principles to monitor financial performance and determine the number of resources. Companies base their decisions on the results of the examination of financial statements. Further, accounting standards enhance the accuracy of the financial results. One of the current issues in accounting is that accountants and financial analysts make errors when making budgets or financial statements. Accounting errors affect the quality of financial statements. The types of errors committed by the accountants include omission, cross-listing, forecasting, and disclosure. Consequently, the companies make wrong judgments on the financial performance. Investors can make wrong decisions when they use inaccurate financial reports. The accounting standards are essential for guiding the accountants in eliminating errors. Accountants and analysts should present the financial information that is free from errors by incorporating accounting standards.
Trends
The rates of accounting errors vary between organizations. The prevalence of errors in the financial reports depends on the kind of auditor and the number of clients. For instance, the big four and second-tier auditors have low error rates (Burks, 2015). Therefore, companies that recruit big four or second-tier auditors provide accurate financial statements. Accounting errors influence the performance of internal control activities negatively (Burks, 2015). The internal processes of the non-profit institutions are affected in spite of receiving funds from the government. Around 6% of the financial reports in the non-profit organization contain errors. The rate is more than 60% of the errors omissions found in the financial reports of public traded corporations (Burks, 2015). The trend of the error rate in non-profit firms is twice higher than that of similar companies. Accountants overstate or understate the figures in the income and accounts receivables. The other errors spread through the financial reports where wrong calculations are presented. The errors affect the net worth of the assets in an organization (Burks, 2015). The firm’s budgets are affected after the accountants omit or add figures in the reports.
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Literature Review
Research on accounting errors is mixed. Scholars claim that accounting standards can reduce errors in the reports. Burks (2015) researched on accounting errors in non-profit institutions. The author found that the errors cause inefficiencies in the internal control activities. Further, the author found that there is a negative correlation between the error rate and the type of auditors. The researcher used a sample of 5,511 financial reports from 2006 to 2010 (Burks, 2015). The data of the study was collected from the GuideStar website which contains financial reports of non-profit firms. The scholar recommended that the accounting errors are corrected through auditing and making adjustments in the footnotes, but they are eliminated in the IFRS form. The regression methods applied in the study were ineffective in establishing the relationship between error rates and company size or budget for administrative costs (Burks, 2015). The author was successful in establishing the effects of errors on the performance of the organization.
Researchers claim that changes in stock shares can cause errors in financial reports. Abed, Abdallah, & Ismail (2012) researched on the effects of cross-listing on forecasting error. The authors aimed at discovering whether the variations in the accounting between different organizations can affect the forecasting error. The outcomes demonstrated that the forecasting errors among financial analysts increase companies that adopt US GAAP/ IAS. Alternatively, the organizations that reconcile with IAS/ US GAAP have few financial analysts (Abed, Abdallah, & Ismail, 2012). The scholars did not use field data to support the facts on cross-listing or forecasting errors. The study contains a literature review on the information related to forecasting, financial analysts and cross-listing. The researchers used the univariate and multivariate methods to assess the samples collected from the firms using GAAP. The scholars used a sample of 2,409 companies from 49 nations. Abed, Abdallah, and Ismail (2012) fulfilled the condition of the sample by selecting firms that were cross-listed. The scholars retrieved data from various websites such as PORTAL, NYSE, AMEX, LSE, NASDAQ, and LSE. The companies that were selected were based in the US and UK (Abed, Abdallah, & Ismail, 2012). Accounting standards influence the errors in the financial statements.
Researchers perceive that accounting standards eliminate errors in a company’s reports. Chen, Ding, Xu (2011) focused on assessing the influence of accounting principles on convergence and FDI (foreign direct investments). The scholars revealed that the application of IFSR facilitates FDI because the data processing expenses for international investors reduce. The authors conducted a hypothesis on the magnitude of reducing information costs for nations whose accounting structure illustrate great pre-convergence variations. Chen, Ding, and Xu (2011) found that the decrease in the data process expenses had a significant effect on the convergence of companies to Foreign Direct Investments. The sample used in the research was FDI information from 30 OECD nations from 2000 to 2005. The researchers successfully provided evidence on the impacts of GAAP on FDI.
In summary, the study conducted by Burks (2015) is substantial. The researcher used a large sample of 5, 511 financial statements to draw findings and conclusions. Further, Burks used peer-reviewed information in the study which presents the current situation of the problem. The other scholars used outdated data to make conclusions. The conclusions and findings of the outdated information could be inaccurate. Burks applied statistical methods including regression to analyze the sample information. On the contrary, other scholars did not apply and statistical method.
Assessment of Accounting Principles and Standards (GAAP and IFRS)
The GAAP standards are issued by the FASB. The principles are based on rules which accountants must follow when recording and making financial statements. The first principle is the economic entity principle. Accountants must separate the figures of each economic entity when making financial reports. Economic institutions include enterprises, social organizations, schools, or churches. The assets of the entrepreneurs should be excluded from the reports. The second principle that financial analysts should follow is the monetary assumption rule. Some activities that take place in the company are not quantifiable including recruiting new employees. The figures in the financial statements should be recorded using a stable currency. The third rule involves full disclosure of past activities and incomplete transactions of the company.
Analysts can use footnotes to identify the pending payments to the company. The fourth principle focuses on recording the transaction based on the time established by the corporation. The fifth rule involves the use of the accrual method over the cash basis approach. In this case, the accountant will record the transactions once they are earned. The other rule is that the figures must be relevant, reliable, and consistent to enhance accuracy. Alternatively, IFRS standards are issued by the IASB which are based on principles. Accountants should comply with the principles when creating financial statements. The IFRS guidelines contain principle and methods for every item in the financial statements. From the analysis, it is evident that IRFS principles are effective in eliminating errors in the financial statements. Following the GAAP standards can cause overstatement or understatement of the figures in the reports. It is necessary to record the actual figure to determine the firm’s financial position to guide the managers or investors in making decisions.
Judgments and Recommendations
Companies and investors can make wrong judgments when using inaccurate financial reports. An organization can choose to fund a project after discovering that there are adequate financial resources. The increase in finances could be an overstatement. As a result, the company can face financial instability due to overuse of funds. The accountants should record the specific finances for the firm to make decisions. Another illustration could be an investor can invest in a company whose records indicate that it is performing reasonably. The records could be inaccurate where the investors can lose the invested finances. A firm can decide to eliminate a project due to the scarcity of funds as recorded in the statements. It could be an understatement where the company can lose the opportunity of expanding or developing an essential product. Also, an investor can lose a chance of investing in a company after assessing wrong statements.
Firstly, accountants should record the revenue and expenses after the company receive payments which enhances the accuracy. The revenue should be recorded in the reports once they are paid to avoid overstatement of the income. Analysts should record expenses after the organization has completed the transactions to avoid understatement of financial results. Accountants should not use the decisions to make estimates of the transaction in the company. Instead, they should make reports that reflect the actual figures. Organizations should advise financial reporters to use the cash basis approach to ensure that they record the activities after the payments are settled. Preferably, firms should follow the IFRS principles which are precise as compared to the GAAP standards. By incorporating the IFRS standards in the financial reporting process, the analysts will create accurate statements.
Diversity and Ethical Issues
The accounting errors are caused by the lack of common interests between the managers, board of directors, and the stakeholders. Diversity and ethical issues are essential in enhancing financial reporting quality. Diversity focuses on the inclusion of all stakeholders of the company in the financial reporting process. The board of directors should align their financial interests to those of the organization’s stakeholders. Diversity should not be based on corporate policies but aligned with the members’ concerns. Organizations need to include members from different backgrounds and consider their interests. The members from different locations can have ideas on creating accurate reports for a fair presentation of the results. By embracing diversity, accountants can have common interests in presenting results. Investors can come from various backgrounds to foster a firm’s financial security. The businesspersons can interact with accounting firms to ensure the outcomes of the financial activities are presented correctly.
The prevailing ethical issue that causes accounting errors is the conflicts of interest. Managers and stakeholders have different interests related to financial reporting. Due to the differences in interests, accountants face challenges in recording expenses and revenues. At times, they record the transactions based on the judgments or estimates. It can lead to inaccurate records where the firm or investors can make wrong decisions. Accountants face dilemmas in including revenue because they can be losses in a department but a profit to another section. Some transactions can affect the stock values f the company which can encourage or discourage entrepreneurs from making investments. In ethical dilemmas, accountants make difficult but principled choices to satisfy the affected parties.
Implications of Research to Personal Interests and Organization
The research has provided insights into my interests in the accounting field. I aim to create a fair presentation where managers and investors can make correct decisions regarding investments or projects. I want to become an accountant of a reputable corporation. Basing on the research, I will identify the potential legal issues that can affect my decision on recording transaction when making financial reports. I will consult the managers, accounting bodies, or government organizations such as the United States SEC. I can refer to the AICPA or FEI for ethical dilemmas because they contain the code of ethics. The IESBA contains ethical regulations that are essential in providing solutions to dilemmas.
The second approach that I can take is referring to the academic concepts on ethics and financial reporting. In case there are any recommendations, I can apply them to solve the problem. Thirdly, I will identify the parties affected by the situation before making a decision. It involves assessing the impact of the decision on the parties. The choice should meet the interests of the affected individuals. Lastly, it is important to get professional advice before making the decision. I can meet with the board or colleagues to ensure that choice is not based on my understanding. I will use the method that is suitable for every case to meet the financial reporting requirements.
Organizations should select the accounting standards that enhance accuracy in the financial reports. The appropriate standards that establish the accuracy of the transactions are the IFRS principles. By using the IFRS formulas or principles, accountants present clear and concise financial information. Companies should use the cash basis method to record the financial agreement rather than the accrual technique. The information on financial reporting should be presented to the analysts and accountants after recruitment. Before institutions make decisions, it is important to examine the accuracy of the financial results. A company can hire auditors to assess the financial statements before presenting them to the stakeholders. In case any mistakes are found, the adjustments can be made on the footnotes. Firms should ensure that employees have the code of ethics for reference during dilemmas.
Reflection on an Accounting Profession in the Community
The chief and tax accountant of Apple Corporation are responsible for making financial reports. The employees in the accounting department contribute to creating the statements, but the chief and tax accountant make the ultimate decisions. The managers and stakeholders of Apple Corporation expect that the accountants should create accurate financial statements for them to make concrete decisions. The chief accountant determines the revenues and expenses that should be included in the financial statements. Besides, the accountant is responsible for determining the accounting methods and standards that can be applied in a particular period. Thus, the accountant needs to choose a method that can enhance the accuracy of the financial results. The tax accountant determines the tax revenue and expenses that should be recorded in the financial statements.
The chief accountant solves ethical dilemmas that occur during the financial reporting procedure. For instance, the chief accountant makes decisions on financial activities that should be recorded or eliminated in the reports. The accountant solves reporting cases based on conflicts of interests. The tax accountants can be involved in the decision-making process in case ethical issues arise. The senior accountant oversees the activities in the accounting department by directing employees on adhering to the rules of the code of ethics and applying the accounting principles in reporting. Also, the chief accountant of Apple Corporation enhances diversity in various departments to ensure that the employees share similar goals on reporting financial agreements. The accountant collaborates with tax officer to have common goals and reduce conflicts.
In conclusion, accountants face challenges when making financial reports. The current issue that is affecting most organizations is errors in the statements. Accountants can overstate or understate the values which influence the company’s and investors’ choices. Accounting principles are significant to the organization’s reports. Corporations and investors make wrong decisions when they use misrepresented statements. Companies should choose suitable accounting standards to get results that reflect the actual performance. Diversity and ethical issues affect financial reporting approaches. Organizations need to consider the accounting standards, diversity, and ethical issues to apply the right recommendation for successful financial presentation.
References
Abed, A. L., Abdallah, W., & Ismail, A. (2012). Do accounting standards matter to financial analysts? An empirical analysis of the effect of cross-listing from different accounting standards regimes on analyst following and forecast error. The International Journal of Accounting , 47 (2), 168-197. Retrieved from https://www.sciencedirect.com/science/article/pii/S0020706312000374?via%3Dihub
Burks, J. J. (2015). Accounting errors in nonprofit organizations. Accounting Horizons , 29 (2), 341-361. Retrieved from http://aaapubs.org/doi/pdf/10.2308/acch-51017
Chen, C. J., Ding, Y., & Xu, B. (2014). Convergence of accounting standards and foreign direct investment. The International Journal of Accounting , 49 (1), 53-86. Retrieved from https://www.sciencedirect.com/science/article/pii/S0020706314000089?via%3Dihub
