...Cookie Jar Reserves and Conservative Accounting ACCT 495 Professor Jastrzebski Fall 2013 Cookie Jar Reserves and Conservative Accounting SUMMARY O'Brian Software, a multimillion dollar software company, provides custom software systems, maintenance, support and training. Nick, a recent college graduate, just began working for the family run software company. After being hired to the firm's accounting department, Nick began to suspect unintentional and misleading revenue recognition . Nick believes his Aunt Amelia, founder and CEO, is an honest business woman and that her chosen CFO, Lee Marchetti, is also an honest man. Nick also knows that the financial statements have been reviewed and approved by the internal and external auditors and the firm's internal controls are effective. Despite these facts, Nick believes the firm has been smoothing earnings and creating inflated reserves. Most firms are usually charged with inflating earnings instead of under reporting, but both are equally illegal and unethical. After approaching Lee Marchetti with his concerns, Nick has informed his aunt, who has little accounting knowledge, of his suspected issues. Nick and Aunt Amelia are now faced with the decision as to whether or not the audit committee should be made aware of these concerns. ISSUES There are three issues at play regarding proper accounting and ethical business practices. The first issue is whether or not O'Brian...
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...• Case 1-4 Generally Accepted Accounting Principles At the completion of the Darby Department Store audit, the president asks about the meaning of the phrase “in conformity with generally accepted accounting principles,” which appears in your audit report on the management’s financial statements. He observes that the meaning of the phrase must include more than what he thinks of as “principles.” Required: a. Explain the meaning of the term accounting principles as used in the audit report. (Do not in this part discuss the significance of “generally accepted.”) "Generally accepted accounting principles" is a guideline of accounting practices and processes which define how accounting professionals are to report the daily activity of the business performance relating to the revenue and expenses, in/outflows of cash and any other material activity relating to the value of the business. b. The president wants to know how you determine whether or not an accounting principle is generally accepted. Discuss the sources of evidence for determining whether an accounting principle has substantial authoritative support. Accounting guidelines are just that, guidelines. The entity is obligated to choose a guideline that is appropriate handling for the transactions. The accounting principle must be consistent and pronounced in FASB, AICPA and their respective Technical Bulletins and Accounting Guidelines and Statements of Position. If the accounting treatment for a transaction or event is...
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...Financial Reporting Timeline The creation of: 1. Committee on Accounting Procedures Role - With the recent increase in members, the SEC delegated the responsibility of issuing pronouncements on accounting principles to the Committee. The SEC worked with the Committee on Accounting Procedures to develop standards for accounting and financial reporting and issued 51 Accounting Research Bulletins (ARBs) over its lifetime. In 1949, they updated 42 of their original ARBs and codified them. a. History - In 1933, the Special Committee on Development of Accounting Principles was formed by the AICPA. Quite simply, this committee did not get much done and was replaced by the Committee on Account Procedures in 1936. For the first two years, this committee also made very little progress. In 1938, the Securities and Exchange Commission issued Accounting Series Release No. 4 which asserted that any financial statements prepared in accordance with principles that had no substantial authoritative support would be considered inaccurate. This prompted the CAP to expand from 7 members to 21 members and increased its activity. b. Structure – The Committee on Accounting Procedures was committee formed by the American Institute of Accountants after the SEC delegated to it the responsibility of issuing pronouncements on accounting principles without government council. Initially, the CAP wanted to create guidance for solving accounting problems, but did not believe they had enough...
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...receive financial and other significant information concerning securities being offered for public sale; and prohibit deceit, misrepresentations, and other fraud in the sale of securities (The Laws That Govern the Securities Industry , 2012). The Securities Act of 1934 The Securities Act of 1934 Congress created the Securities and Exchange Commission. The Act empowers the SEC with authority over all aspects of the securities industry. The Act also allows the SEC to require periodic reporting of information by companies with publicly traded securities. As well, the Act identifies and prohibits certain types of conduct in the markets and provides the commission with disciplinary powers over regulated entities and persons associated with them (The Laws That Govern the Securities Industry , 2012). Committee on Accounting Procedures (CAP) 1938 The Institute Committee on Accounting Procedures became the first accounting standard-setting body for the private sector. It was the predecessor to the Accounting Principles Board, created by the American Institute of Accountants (Moussalli, 2005). Accounting Principles Board 1959 The Accounting Principles Board replaced the CAP as the authoritative financial accounting body. The Accounting Principles Board was replaced in 1973 by the Financial Accounting Standards Board (FASB). The APB was replaced because the SEC felt that a smaller full time body would have more success (Moussalli, 2005). Financial Accounting Standards...
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...Summary Nick O’Brian is a recent college graduate. He began working in the accounting department at his aunt’s software company, O’Brian Software. Nick is going over the financial statements when he recognizes some questionable revenue recognition issues. Nick proceeds to address his concerns with the chief financial officer of the company, Lee Marchetti. Lee explains to Nick how revenue recognition is broken down and that a lot of information and judgment is involved. It is also pointed out that since the company went public three years ago they have consistently received ‘clean’ opinions from external auditors. Nick admits that Marchetti strikes him as a honest man with years of experience. Out of concern for his aunt’s company he approached his aunt, who is not known for her accounting expertise, but is the CEO of O’Brian Software. After explaining his concerns she asked Nick whether or not they should present this information to the audit committee. Issues/Questions The initial question is whether or not the audit committee should be made aware of Nick’s revenue recognition concerns. As President and CEO of Softrax Corporation, Robert O’Connor, points out, this is a serious claim. It is imperative that Nick does his research before making such a claim. The underlying issue in this case is if O’Brian Software is creating ‘cookie jar’ reserves by understating profits in periods of prosperity and then creating false reserves in times the company needs a boost. The...
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...Management Representations 1941 AU Section 333 Management Representations (Supersedes SAS No. 19.) Source: SAS No. 85; SAS No. 89; SAS No. 99; SAS No. 113. See section 9333 for interpretations of this section. Effective for audits of financial statements for periods ending on or after June 30, 1998, unless otherwise indicated. Introduction .01 This section establishes a requirement that the independent auditor obtain written representations from management as a part of an audit of financial statements performed in accordance with generally accepted auditing standards and provides guidance concerning the representations to be obtained. Reliance on Management Representations .02 During an audit, management makes many representations to the auditor, both oral and written, in response to specific inquiries or through the financial statements. Such representations from management are part of the audit evidence the independent auditor obtains, but they are not a substitute for the application of those auditing procedures necessary to afford a reasonable basis for an opinion regarding the financial statements under audit. Written representations from management ordinarily confirm representations explicitly or implicitly given to the auditor, indicate and document the continuing appropriateness of such representations, and reduce the possibility of misunderstanding concerning the matters that are the subject of the representations. [Revised, March 2006, to reflect conforming...
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...Accounting Standards Harmonization and Financial Statement Comparability: Evidence from Transnational Information Transfer Clare Wang The Wharton School University of Pennsylvania wclare@wharton.upenn.edu Current Version: January 2011 Abstract This study investigates whether harmonization of accounting standards enhances the comparability of Önancial information across countries. First, I statistically deÖne and link comparability to Örm value in a two-Örm, sequential information release framework. I then empirically test the prediction that a Örm yet to announce earnings reacts more strongly to the earnings announcement of a foreign Örm when both report under the same rather than di§erent accounting standards. My analysis of abnormal price and volume reactions for a global sample of Örms supports this prediction. Next, in an attempt to control for the e§ects of changes in reporting quality, I use a di§erence-in-di§erences design around the mandatory introduction of International Financial Reporting Standards (IFRS). I Önd that mandatory adopters experience a signiÖcant increase in market reactions to the release of earnings by voluntary adopters compared to pre-mandatory adoption. This increase is not observed for non-adopters over the same period. Taken together, my study shows that accounting standards harmonization facilitates transnational information transfer, and suggests comparability as a direct mechanism. I thank my dissertation committee members Brian Bushee,...
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...210, 229, 230, 240, 244 and 249 [RELEASE NOS. 33-8982; 34-58960; File No. S7-27-08] RIN 3235-AJ93 ROADMAP FOR THE POTENTIAL USE OF FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS BY U.S. ISSUERS AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: The Securities and Exchange Commission (“Commission”) is proposing a Roadmap for the potential use of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board by U.S. issuers for purposes of their filings with the Commission. This Roadmap sets forth several milestones that, if achieved, could lead to the required use of IFRS by U.S. issuers in 2014 if the Commission believes it to be in the public interest and for the protection of investors. This Roadmap also includes discussion of various areas of consideration for market participants related to the eventual use of IFRS in the United States. As part of the Roadmap, the Commission is proposing amendments to various regulations, rules and forms that would permit early use of IFRS by a limited number of U.S. issuers where this would enhance the comparability of financial information to investors. Only an issuer whose industry uses IFRS as the basis of financial reporting more than any other set of standards would be eligible to elect to use IFRS, beginning with filings in 2010. DATES: ...
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...Proposed Accounting Standards Update (Revised) Issued: May 16, 2013 Comments Due: September 13, 2013 Leases (Topic 842) a revision of the 2010 proposed FASB Accounting Standards Update, Leases (Topic 840) This Exposure Draft of a proposed Accounting Standards Update of Topic 842 is issued by the Board for public comment. Comments can be provided using the electronic feedback form available on the FASB website. Written comments should be addressed to: Technical Director File Reference No. 2013-270 The FASB Accounting Standards Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. Notice to Recipients of This Exposure Draft of a Proposed Accounting Standards Update The Board invites comments on all matters in this Exposure Draft and is requesting comments by September 13, 2013. Interested parties may submit comments in one of three ways: Using the electronic feedback form available on the FASB website at Exposure Documents Open for Comment Emailing a written letter to director@fasb.org, File Reference No. 2013270 Sending written comments to ―Technical Director, File Reference...
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...17 CFR Parts 210, 229, 230, 240, 244 and 249 [RELEASE NOS. 33-8982; 34-58960; File No. S7-27-08] RIN 3235-AJ93 ROADMAP FOR THE POTENTIAL USE OF FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS BY U.S. ISSUERS AGENCY: ACTION: Securities and Exchange Commission. Proposed rule. SUMMARY: The Securities and Exchange Commission (“Commission”) is proposing a Roadmap for the potential use of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board by U.S. issuers for purposes of their filings with the Commission. This Roadmap sets forth several milestones that, if achieved, could lead to the required use of IFRS by U.S. issuers in 2014 if the Commission believes it to be in the public interest and for the protection of investors. This Roadmap also includes discussion of various areas of consideration for market participants related to the eventual use of IFRS in the United States. As part of the Roadmap, the Commission is proposing amendments to various regulations, rules and forms that would permit early use of IFRS by a limited number of U.S. issuers where this would enhance the comparability of financial information to investors. Only an issuer whose industry uses IFRS as the basis of financial reporting more than any other set of standards would be eligible to elect to use IFRS, beginning with filings in 2010. DATES: Comments should...
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...CHAPTER 1 Financial Accounting and Accounting Standards ASSIGNMENT CLASSIFICATION TABLE Topics 1. 2. 3. Subject matter of accounting. Environment of accounting. Role of principles, objectives, standards, and accounting theory. Historical development of accounting standards. Authoritative pronouncements and standards-setting bodies. Questions 1 2, 3, 4 5, 6, 7, 8 Cases 1 3, 4 2, 4 4. 8, 9, 10, 11, 12 5, 17 5. 13, 14, 15, 16, 17, 18, 19, 20, 21, 22 23, 24, 25, 26, 27 28 29 6, 7, 8, 10, 11, 12, 13, 15, 16 6. 7. 8. Role of pressure groups. International accounting. Ethical issues. 9, 18, 19 15 14 1-1 ASSIGNMENT CHARACTERISTICS TABLE Item C1-1 C1-2 C1-3 C1-4 C1-5 C1-6 C1-7 C1-8 C1-9 C1-10 C1-11 C1-12 C1-13 C1-14 C1-15 C1-16 C1-17 C1-18 C1-19 Description Financial accounting. Objectives of financial reporting. Accounting numbers and the environment. Need for accounting standards. AICPA’s role in standards setting. FASB role in standards setting. Government role in standards setting. Meaning of generally accepted accounting principles. Politicalization of standards setting. Models for setting accounting standards. Standards-setting terminology. Accounting organizations and documents issued. Accounting pronouncements. Issues involving standards setting. Securities and Exchange Commission. Standards-setting process. History of standards-setting organizations. Economic Consequences. Standards-setting process, economic consequences. Level of Difficulty...
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...Explaining Basic Accounting Concepts and Business Structures Generally Accepted Accounting Principles (GAAP) are guidelines for accounting that have either been specifically established by one of the governing bodies tasked with establishing and overseeing accounting practices or are “accepted” as a practice by having been time proven and having “universal” application (Kieso, Weygandt, and Warfield (2007). There are four main organizations that are “instrumental in the development of financial standards (GAAP) in the United States.” (Kieso, Weygandt, and Warfield (2007). These are the Securities and Exchange Commission (SEC), the American Institute of Certified Public Accountants (AICPA), Financial Accounting Standards Board (FASB), and the Government Accounting Standards Board. (GASB) (Kieso, Weygandt, and Warfield (2007) The SEC is the sole body for enforcement, with the AICPA and the FASB having been created at the urging of the SEC for a private sector entity to use its resources to establish effective guidelines. The SEC continues to support the formation and improvement of accounting guidelines by the private sector as long as they are “subject to commission oversight” (Kieso, Weygandt, and Warfield (2007). The FASB uses “The Hierarchy of Generally Accepted Accounting Principles,” and they are listed as follows: FASB Standards, Interpretations, Staff Positions, APB (Accounting Principles Board), and AICPA Accounting Research Bulletins...
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...Explaining Basic Accounting Concepts and Business Structures The Hierarchy of Generally Accepted Accounting Principles identifies the sources for the accounting standards and principles. These sources include “FASB Standards, Interpretations, and Staff Positions; APB Opinions; and AICPA Accounting Research Bulletins” (Kieso, Weygandt, & Warfield, 2007, p. 12). When companies prepare financial statements in accordance with GAAP, they sometimes run into situations in which some standards do not address a certain situation or two standards may conflict. Because of this the Statement of Accounting Standard Number (SAS) 69 established a hierarchy to follow. The hierarchy forms a kind of order for GAAP rules and procedures used in preparing financial statements. The hierarchy is made up of four categories that have a descending level of authority. For example, “Category A consists of the following principles: FASB Statements of Financial Accounting Standards, FASB Interpretations, APB Opinions, and AICPA Accounting Research Bulletins” (eNotes, 2011, para. 5). Because the categories are in descending order, category A would take precedence over the other three categories. The FASB identified certain qualities of accounting information that make it effective for making decision. For accounting information to be considered effective it should possess these four qualities: relevance, reliability, comparability, and consistency. The information should be relevant enough to...
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...function and primary focus of financial accounting. Level of Learning: Easy 28. The primary focus for financial accounting information is to provide information useful for: A. Option A B. Option B C. Option C D. Option D AACSB: Reflective thinking Bloom's: Knowledge Learning Objective: 01-01 Describe the function and primary focus of financial accounting. Level of Learning: Easy 29. Which of the following is not true about net operating cash flow? A. It is the difference between cash receipts and cash disbursements from providing goods and services. B. It is a measure used in accrual accounting and is recognized as the best predictor of future operating cash flows. C. Over short periods of time, it may not be indicative of long-run cash-generating ability. D. It is easy to understand and all information required to measure it is factual. AACSB: Reflective thinking Bloom's: Knowledge Learning Objective: 01-01 Describe the function and primary focus of financial accounting. Level of Learning: Medium 30. Which of the following groups is not among financial intermediaries? A. Mutual fund managers B. Financial analysts C. CPAs D. Credit rating organizations AACSB: Reflective thinking Bloom's: Knowledge Learning Objective: 01-01 Describe the function and primary focus of financial accounting. Level of Learning: Medium 31. Which of the following was the first private sector entity that set accounting standards in the United...
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...The standard setting process The recent, high profile accounting scandals shook the foundations of the capital markets. Financial reporting furnishes investors and other stakeholders with reliable and relevant information. In the short term unethical financial reporting resulted in loss of billion dollars, but in the long term the impact was even more severe: loss of confidence in financial reporting as reliable source of information. The following reforms aimed to restore investor confidence in financial reporting and accounting profession. They reinforced the importance of ethics in financial reporting and provided recommendation on accounting standard setting process. The following paper provides a brief discussion on standard setting organizations and process and the authoritative sources of accounting. This study also covers the objectives of financial reporting and its role in today’s economy and concludes that ethics will remain cornerstone of the accounting profession. Table of Contents Abstract 2 The standard setting process 4 Standard setting process and authoritative sources of accounting information 5 Objectives of financial reporting 6 Ethics’ role in financial reporting 6 Conclusion 7 References 10 The standard setting process The dawn of the new century brought an economic downturn. The tragic events of 9/11 and the burst of the dot.com bubble accelerated the general decline. Investors kept corporate managements under constant pressure...
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