Week 6

Question 1

What is the difference between creative accounting and fraudulent financial reporting?

Answer 1

• Creative accounting: using the flexibility within accounting to manage the measurement and presentation of the accounts so that they serve the interests of preparers
• Fraudulent financial reporting: intentional misstatements including omissions of amounts or disclosures in financial statements to deceive financial statement users

Question 2

Whare are the four main ways to achieve creative accounting?

Answer 2

• Where an accounting standard allows a choice e.g depreciate or to not depreciate, historical cost v fair value (revaluation)
• Use of bias in making estimates
• Deliberate structuring of a transaction in a particular way
• Altering the timing of a transaction

Question 3

What are the materiality benchmarks (determine if there is fraudulent financial reporting at play)?

Answer 3

• 1% revenue
• 5-10% PBT
• 1-2% total assets

Question 4

What motivates people to commit fraud/creative accounting?

Answer 4

• Meet internal or external earnings expectations
• An attempt to conceal the company’s deteriorating financial condition
• Increase the share price
• Financial performance for pending equity or debt financing
• The desire to increase management compensation based on financial results

Question 5

What is the Ethical Code for accountants and its five principles?

Answer 5

• Integrity: honest
• Objectivity: not biased
• Comeptence and due care
• Confidentiality
• Professional behaviour

Question 6

What are specific threats to ethical behaviour?

Answer 6

• Self-interest => monetary incentive i.e bonus
• Self-review => more relevant to an accountant working in audit, assist preparers in creating an audit review and giving an opinion an on it
• Familiarity => too trusting losing the area of scepticism e.g friends with colleagues
• Intimidation
• Advocacy => promoting company in an inappropriate way (not in a fair presentation)