1、1FINANCIAL ACCOUNTING AND REPORTING IN NORTH AMERICAPresented at School of Management,UESTCByGeorge Lan,PhDAssociate Professor of AccountingUniversity Of WindsorWindsor,Ontario,CanadaMarch 19,2003天马行空官方博客：http:/ of Presentation-1nRoles of standard setting bodies(FASB,CICA),Managers,Auditors and Supp
2、liers of Capital(Investors and Creditors or lenders)See DiagramnInformation Economics Approach and Efficiency of capital markets nWorldCom,Enron and Arthur AndersennIncentives of Management to Manage Earnings 3Outline of Presentation-2nSteps to prevent scandals from occurring in the future?nSome Eth
3、ical PrinciplesnAn Ethical CasenQuestions regarding presentation or any other(accounting)questions.4Information Economics ApproachnInformation Asymmetry exists between the parties in business transactions.The managers(agents)have more information than the investors(principals).nManagers may attempt
4、to select policies or to release biased information that benefit themselves to the expense of the owners.n Role of Accounting:to provide information useful for rational decision-making.5Decision Usefulness ApproachnSection 1000 of CICA Handbook(par.1000.15):nThe objective of financial statements is
5、to communicate information that is useful to investors,members,contributors,creditors and other usersin making their resource allocation decisions and/or assessing management stewardship.6Objectives of Financial StatementsnStatements of Financial Accounting Concepts(1978)(SFAC 1):nTo provide informa
6、tion that is useful to present and potential investors and creditors and other users in making rational investment,credit,and similar decisions.nTo provide information to help present and potential investors and creditors in assessing the amounts,timing and uncertainty of prospective cash receipts f
7、rom dividends or interest.7Relevance and ReliabilitynTo be useful,accounting information should provide an informative information system that links current financial statements with future state realizations and payoffs.nAccounting information should be relevant I.e.has the capacity to affect inves
8、tors beliefs about future returns.nAccounting information should be reliable i.e.should faithfully represents what it purports to measure.It should be precise and free from bias.8Elements of Financial StatementsnAssets:Probable future economic benefits obtained or controlled as a result of past tran
9、sactions.nLiabilities:Probable future sacrifices of economic benefitsnOwners Equity:residual Interest in assets after deducting liabilities i.e.A=L+O.E.or O.E=A L.nRevenues:inflows of assets(or settlement of liabilities)arising from the entitys major or ongoing activities.9Accounting Principles-1nHi
10、storical Cost Principle i.e.recognise(record and report)assets and liabilities initially at the cash-equivalent cost.nRevenue Recognition Principle i.e.recognise revenues when earned(earning process is complete and an exchange has taken place).All necessary costs have been incurred and collection is
11、 assured usually at point at sale.10Accounting Principles-2nMatching Principle i.e.recognise all expenses incurred in producing revenues in the same period as the revenues.nFull Disclosure Principle i.e.disclose all relevant information.11LANS CLOTHING COMPANYnInvest 10,000 Yuans(Y)to start the busi
12、nessnBuy 1000 shirts at 5 Y each.nPay wages of 1000 Y for the first month.nSell 400 shirts at 20 Y each.nPay rent of 600 Y for the first 6 months.nIncurred miscellaneous expenses of 500 Y.nBorrowed 4800 Y and bought a truck.Truck will last for 4 years.nWhat is my net income for first month?Lans Clot
13、hingNet Income for first monthnNet Income before taxes=Revenues Expenses=400 X 20(sales)-400 X 5(cost of shirts sold)1000(wages expense)600/6(rent for one month)500(miscellaneous expenses)-4800/48(amortisation expense for 1 month)=4,300 Yuans13Standard Setting&Auditing-1nStandard setting or regulati
14、on is necessary to protect the investors(conflicting interests of investors and managers).The FASB(Financial Accounting Standards Board and the CICA(Canadian Institute of Chartered Accountants)are independent bodies.14Standard Setting&Auditing-2nAuditing(external)ensures that a third independent par
15、ty has examined the financial statements and that they are in accordance to GAAP(Generally Accepted Accounting Principles).15Efficient Securities MarketsnThe prices of securities(stocks)“properly reflect”all information that is publicly known about these securities.nInvestors will quickly adjust to
16、new or corrected information as it becomes available.nInvestors cannot expect to earn abnormal returns i.e.a return on a security in excess of its normal expected return.16WORLDCOM(Communications Industry)-1nLargest Bankruptcy in history.Bankruptcy date=July 21,2002.Total assets(pre-bankruptcy)=US$1
17、03,914,000,000 approximately 850,000 millions Yuans or RMB(assuming 1 us dollar approximately equal to 8.2 Yuans)17WORLDCOM(Communications Industry)-2nInternal Auditor(Cynthia Cooper-Time Magazine Person of the year for 2002)went to Board of Directors,claiming assets should be written off the balanc
18、e sheet.nB.O.D.agree with her.On writing off assets,large losses.Stock prices fell down steeply.18Enron Corp(Energy Industry)nCompany went bankrupt on December 2,2001.Total assets pre-bankruptcy=US$63,392,000,000 approximately equal to 520,000 millions Yuans or RMB.nProfits overstated;revenues recog
19、nized before they are earned.nLiabilities hidden from balance sheet.nGambling on energy futures contracts.nSherri Watkins(Enron manager)blew the whistle but no one listened.19Arthur Andersen(Former“Big Five”Accounting Firm)nIssued unqualified opinion to financial statements.Did not disclose accounti
20、ng irregularities.nShredded documents to hide evidence.nGuilty of obstructing justice.20Managements Incentives to Manage EarningsnIncome taxesPostpone payment by minimizing reported incomenBonusMaximize their bonuses by increasing reported incomenDebt Agreements Easier to meet debt agreements(covena
21、nts)by increasing income and assetsnStock options(give you the right to purchase a stock at a fixed price in some future period)maximize share prices(believed to be related to reported income).21Accruals and Earnings ManagementnAmortization expensenIncrease in net receivablesnIncrease in inventorynD
22、ecrease in accounts payable and accrual liabilities22What could be done?nBetter accounting standards and better disclosure.Less emphasis on historical cost and more emphasis on current market value of assets and liabilities on balance sheet.nFore example,record all stock options as an expense on inc
23、ome statement,when issued.nRestrictions on auditors e.g.auditors not allowed to do consulting work for firm they auditnGreater accountability of board of directors and more punishment for wrong doings.23Ethics and accountingnEthicsnRules Of Professional ConductnLegalnWhat is legal or meet the rules
24、of professional conduct may not be considered ethical.24Some Principles to Evaluate Ones Actions-1nNon-Maleficence:Am I causing harm by failing to do something or agreeing with it?nBeneficence:Do my actions benefit other persons besides myself?nJustice:Do I treat those for whom I am responsible equi
25、tably(fairly)?25Some Principles to Evaluate Ones Actions-2nFidelity:Do I uphold my part of the relationship?nAct Consciously:Do I know the assumptions on which I base my actions and are they valid?nUtilitarianismnDeontology26Consequences or Nature of Actions?nUtilitarianism:British Philosopher John
26、Stuart Mill(1806-1873)Do my actions promote “the Greatest Good for the Greatest Number of Individuals”?nDeontology:German Philosopher Immanuel Kant(1724-1804)Examine the nature of actions rather than the outcomes achieved.Doing the right thing whatever the consequences.27An Ethical Dilemma(conflict
27、in duties)nSuppose you are the auditor of ABC auditing company and you are doing an audit of XYZ Company(your client).The CFO of XYZ Co refuses to write down some inventory you strongly believe to be obsolete and not worth much.You discuss the situation with your own boss at ABC.Your boss(a good fri
28、end of the CFO)tells you to agree with the CFO.What should you do?28An Ethical Case Analysis FrameworknWhat are the facts?Who are the stakeholders(those affected)?nWhat are the alternatives?nWhat Ethical Principles Apply?n Examine pros(advantages)and cons(disadvantages)of each alternative.nMake a de
29、cision29Applying the FrameworknStakeholders:yourself and family,your boss and company,your client,the public(investors and creditors)who depend on financial statements.nAlternatives:1.Agree with CFO of XYZ Co I.e.do not write down inventory 2.Disagree with your boss 3.Discuss situation with a senior
30、 partner nPros and Cons 30No Easy Answers!-1nAGREE.PROS:Keep boss happy.Position secure for the moment;promotion not affected.CONS:Your integrity and the integrity of the financial statements affected.Investors and other users can lose a lot of money.Potential lawsuit against your company.Your profe
31、ssional certification may be revoked.31No Easy Answers!-2nDISAGREE.PROS:Integrity maintained.Acting equitably.Doing the right thing”.CONS:May harm your career prospects.nCONSULT SENIOR PARTNER.32For Further InformationnEmail:glanuwindsor.canUniversity of Windsor website:www.uwindsor.ca Odette Business School.33Thank You
