corporate governance
DESCRIPTION
Corporate Governance. By: 1. Kenneth A. Kim John R. Nofsinger And 2. A. C. Fernando. Accountants and Auditors. 6 th Lesson. Accountants and Auditors. Last Lecture Review A & A play very important role in corporations. - PowerPoint PPT PresentationTRANSCRIPT
Corporate Governance
By: 1. Kenneth A. Kim John R. Nofsinger
And 2. A. C. Fernando
Accountants and Auditors
6th Lesson
Last Lecture Review◦ A & A play very important role in corporations. ◦ Companies are legally bound to hire A & A to have
crystal clear financial position of a company because its not their money.
◦ Companies face two types of interactions as far as accounting practices are concerned. Accounting for management and for outside world.
Accountants and Auditors
Normally company keeps two types of records in the shape of Financial Accounting and Managerial accounting- which normally do not match.
A single company always must have single financial position, so how is it possible to have two different accounting records.
Lastly, different accounting records means the element of frauds in the company.
Accountants and Auditors
Lecture Outlines◦ Financial statement/position explanation.◦ Accounting records are different for Managers and
Public Financial Statement.◦ Reasons for differences in Financial Accounting
and Managerial Accounting.◦ Problems that may occur in accounting.
Unintentional errors Problems with receivables Intentional Errors. Understated liabilities Overstated assets.
Accountants and Auditors
Who are Responsible◦ Accountant or Manager
Audit Role Types of Auditors
◦ Independent Auditor◦ Internal Auditor◦ Government Auditor.
World largest 4 Audit Firms Summary.
Accountants and Auditors
Financial statement can be explained through;
◦ Income statement A financial statement that measures a company's financial
performance over a specific accounting period. Also known as the "profit and loss statement" or "statement of revenue and expense.
◦ Balance Sheet A financial statement that summarizes a company's assets, liabilities
and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.The balance sheet must follow the following formula:Assets = Liabilities + Shareholders' Equity
Accountants and Auditors
◦ Statement of Cash Flow The document provides aggregate data regarding all
cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given quarter.
◦ Popular press articles
Accountants and Auditors
o And analysts (financial) recommendationso Financial analysts help people decide how to invest
their money. They work for banks, insurance companies, mutual funds, and securities firms. They often meet with company officials to learn more about the firms in which they want to invest. After the meetings, the analysts write reports and give talks about what they found out. Then, they suggest buying or selling that firm's stock.
Accountants and Auditors
That’s how outsiders can easily determine the firm’s value, profit and its risk.
However, SEC is looking for the uniform set of standards for public companies i.e. GAAP (Generally Accepted Accounting Principles).
These statements are prepared by the accountants of the firms and reviewed by the auditors.
Accountants and Auditors
Accounting records are different for;
◦ The managers
◦ Public financial statements
Accountants and Auditors
Reasons for Differences in Financial Accounting and Managerial Accounting
◦ If Financial Accounting shows favourable financial position as compared to Managerial Accounting
1. Company’s management is showing fake financial position of the company i.e. company doesn’t have enough financial position ( as managerial accounting shows) but showing the wrong face of the company to the stakeholders.
Accountants and Auditors
If Managerial Accounting shows favourable financial position as compared to Financial Accounting Company’s management is trying to use the
hidden money for their personal interests i.e. 1. having more perks for themselves
2. using that money for further business, trying to increase the share prices
( trying to gain the maximum benefit from the stocks/shares they hold)
Accountants and Auditors
Problems That May Occur In Accounting
Unintentional Errors◦An accounting-related item is unintentionally
misrepresented or is measured inaccurately. Problems with receivables
◦ Accounts receivable is money owed to a business by its clients (customers or debtors) and shown on its balance sheet as an asset. It is one of a series of accounting transactions dealing with the billing of a customer for goods and services that the customer has ordered.
Accountants and Auditors
Intentional Errors◦ Overstate income statement
Accountants and Auditors
Impact of Error onError in
InventoryCost of Goods
SoldGross Profit Net Income
Ending Inventory =30000 (Actual)
10000 20000 18000
Understated 20000
Overstated 12000
Understated8000
Understated7000
Overstated40000
Understated8000
Overstated32000
Overstated30000
Beginning Inventory=
20000
10000 10000 8000
Understated15000
Understated4000
Overstated11000
Overstated10000
Overstated25000
Overstated17000
Understated8000
Understated6000
◦ Understate liabilities Understated liabilities will automatically show the
improves financial position of the company Assets= Liabilities + Owners’ Equity
◦ Overstate assets (receivables) Overstated Assets will show the fake financial
position of the company. Assets= Liabilities + Owners’ Equity
Accountants and Auditors
Who are responsible
◦Accountants
◦Managers
Accountants and Auditors
Auditing The general definition of an audit is an
evaluation of a person, organization, system, process, enterprise, project or product.
Audits are performed to ascertain the validity and reliability of information.
Accountants and Auditors
Types of Auditors◦ 1. Independent Auditors
Independent auditors are usually CPA’s (Certified Public Accountants) who are either individual practitioners or members of public accounting firms who render professional auditing services to clients. In general, licensing involves passing the uniform CPA examination and obtaining practical experience in auditing.
Accountants and Auditors
2. Internal AuditorsInternal auditors are employees of the organization they audit. This type of auditors is involved in an independent evaluation of evidence, called internal auditing, within an organization as a service to the organization. The objectives of internal auditing is to assist the management of organization in the effective discharge of its responsibilities.
Accountants and Auditors
3. Government AuditorsGovernment auditors are employed by various local, state, and federal governmental agencies. Government auditors are specialists in tax and disclosure regulations.
Internal Auditor Internal auditor is responsible;
◦ To oversee the firm’s financial and operating procedures
◦ To check the accuracy of the financial record-keeping◦ To implement improvements with internal control◦ To ensure compliance with accounting regulations ◦ And to detect fraud.
Accountants and Auditors
Firms are not required to have internal auditors but many firms have them to enhance their accounting and internal control efficiency.
In fact, the people who initially detected financial fraud at WorldCom were the company’s own internal auditors.
Accountants and Auditors
External Auditor
External auditors are the accountants from outside the firms
They review;◦ The firm’s financial statements ◦ The fairness of the statement◦ Assess the system and procedure used by internal
auditors
Accountants and Auditors
To conduct external audit, the auditor’s might;◦ Conduct interviews with the firm’s employees to
assess the quality of the internal audit system.◦ Make their own observations of the firm’s assets.◦ Check sample balance sheet transactions◦ Meeting with the firm’s customers and clients to
assess the firm’s short-term assets and liabilities.◦ Conduct their own financial statement analysis
such as comparing ratios from one period to the next.
◦ In the end they generate the report.
Accountants and Auditors
largest Audit firms are;(BIG FOUR)
Price Waterhouse Coopers (HO in UK)
Deloitte & Touche (HO in US)
Ernst & Young (Ho in UK)
KPMG (HO in Netherland)
Accountants and Auditors
Summary◦ We have discussed how financial position of a
company can be examined through different ways.
◦ Accounting records are different for managers and public financial statement.
◦ Reasons for the difference between financial accounting and managerial accounting are either to show the wrong financial position of the company or to use the company’s money by the management for their personal interests.
◦ Normally, we face different problems that may occur in accounting.
Accountants and Auditors
Here come the role of an auditor to check there errors by the accountants.
There are different types of auditors◦ Independent auditor ◦ Internal auditor◦ Government auditor
Big 4.
The End
Accountants and Auditors