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    sTuoyGuine | 39 Part B: Interaction with society Accounting roles, activities and relationships Relationships and roles Accountants are found in an ever increasing number of roles and relationships in society. The key professional relationships that accountants have are with: = employers; + clients: + employees [if business ovmers or managers); and + their peers. ole] Peers may inclucle work colleagues, other accountants in professional networks and other accountants who work for the same client in a different aspect of accounting, Maintaining good-quality professional relationships is an essential part of being a successful professional accountant, Many factors influence how an individual will behave in their workplace. These factors include culture, standards and ethical evaluations. Other variables that impact on an accountant include: + personal moral development: + family influences and personal relationships, including those at work: ‘+ the organisational level (business structure and relationships with superiors and subordinates, etc laws and regulations; and *+ professional aspects (including professional expectations and professional ethics). These all have an impact on the way problems and issues are dealt with by an individual in the workplace. A threat to, or excessive pressure on, any of these areas has the potential to result in Lunprofessional conduct. Accounting work environments Examples of accounting work environments are shown in Table 1.1. MODULE 1 40 | ACCOUNTING AND socETY Table 1.1: Types of accounting work environments, ‘Werk environment Examples Public practice Public practitioner Big Four accounting frm Secondtier accounting firm ‘Small partnerships and sole practitioners Private or business sector Professional accountant in business ye companies—privately held or publicly listed ‘Small and medium enterprises (SMES) Start-ups Public sector Government departments Public entities e.g. hospitals) High wealth individvals Business organisations Trusts and foundations Financial adv Novforprofit sector Charities Sporting and cultural ascociations Soureo: CPA Avstaia 2015 CPAs must be equioped with a range of skills to function as business leaders. Further, our professional cepabilities are motile, enabling us to work in different geogrephic locations and in various work environments. Public practice accounting Public practice refers to professional accountants who offer accounting services to businesses and the public. The public practice environment can be grouped into three types of firms and practices. Big Four accounting firms ‘The ‘Big Four’, as they are known, are the four largest international professional public practice firms that offer services in accountancy and professional services. ‘These firms are PwC (PricewaterhouseCoopers), Deloitte, Emst & Young and KPMG. These firms ‘each have more than 150 000 employees globally and annual revenues in excess of AUD 20 billion each, Itis worth noting that these ficrns manage the vast majority of audits forall publicly listed ‘companies and many private companies. Second-tier accounting firms Second-tier public practice firms operate on @ smaller scale than the Big Four. They generally have a number of offices in cepital cities and large regional centres, together with some level of intemational engagernent, generally through alliances Stuy GUIDE | 41 ‘Small practices and sole practitioners This level of public practice includes the smaller accounting practices with one professional ‘accountant as practitioner or a team of professional accountants and support staff. Smaller accounting firms tend to be used by small and medium enterprises (SMEs), which often hhave no statutory audit requirements. Accordingly, these practices usually undertake compliance Work that is less related to audit (e.g. tax returns, standard accounting) Roles in public practice While Big Four firms, and to some extent second-tier firms, offer services that include consulting and legal divisions, the range of accounting activities for an accountant in public practice are similar, irespective ofthe size of the practice iol] The types of roles within public practice work environments include those shown in Table 1.2. Table 1.2: Public practice roles Area Activity Assurance and audit| Financial statement attestetion, in which the frm examines and attests to.a company's financial statements, o other assurance services such as assessing procedures and controls relating to privacy and confidentiality, performance measurements, systems reliability information security and outsourced process controls. Financial management Covers areas from performance management to corporate governance, stakeholder relations to risk, as wall asthe traditional financial contol, Taxation services| ‘Covers company and individual taxation, fringe benefits tax FBT, goods and services tax (GST), capital gains tax (CGT) and international tax issues. Forensic accounting Specialised area that involves engagement for legal issues including fraud, disputes or litigation. Insolvency Specialised area that involves engagements in personal insolvencies (ankruptcies) and corporate insolvencies (administrations, liquidations, receiverships). Internal audit services Systematic, disciplined approach to evaluating and enhancing risk management, control and governance processes Business advising ‘Assisting business managers to mora successfully achieve value, The tasks involved are varied, oiten reflecting thet businesses have internally recognised weaknesses or identified that objective external evaluations ‘and contributions can be valuable. It can also extend to advice on business re engineering, restructuring, takeovers and mergers. Source: CPA Australis 2018 MODULE 1 a | ACCOUNTING AND SOCIETY Professional accountants in business Professional accountants are employed by private sector business in varying roles. The scale cof a business's operations will determine the professional accountants’ roles. ‘Accountants employed in the large business environment Many professional accountants work in large corporations, often in specialised roles in accounting and related areas. Roles in private business Roles within private business work environments include those shown in Table 1.3. Table 1.3: Private practice roles Role Responsil Board member Elected to the Board of Directors to oversee the activities of the company or organisation, Finance director or chief financial Formulation, management and review ofthe financial and strategie officer direction of the company or corporate group. Financial accountant Preparation of general purpose financial reports, the annual report ‘and special purpose financial reports as required. May sunervise a team of accountants, ‘Treasury accountant ‘Management of treasury functions of the organisation in order to ensure sufficient cash flow and the effective use of financial Instruments. Risk manager (Quality and risk management responsibility for the business Strategic management accountant Preparation of budgets and forecasts, performance mesaures for analysing and improving organisational performance. Internal auditor Review of internal controls, information and business processes, Human resources accountant Remuneration and payrollwelated functions Company secretary Reporting and regulatory compliance and ensuring, with the chair, the efficient functioning of the board of divectors Seuree: CPA Australis 2008 During their career a professional accountant may remain in a particular role or may move through various functional roles and then on to management levels within the finance ares. Often, professional accountants move into general management roles as a result of the wide capebilities and skills they acquire during their career. Professional accountants are also often found on the boards of companies as directors or company secretaries, Even with changes in the roles performed and challenges faced, which generally become more complex as more senior roles are accepted, @ CPA must continue to maintain the service ideal and continue to comply with professional ethical requirements. STUDY GUIDE | 43 Accounting in small and medium enterprises (SMEs) ‘Small and medium size enterprises (SMEs) vary significantly in their sizo, number of employees, direct ownership control and geographic dispersion of resources. So whet is an SME? IFAC defines SMEs as follows: Entities considered to be of a small and medium size by reference to quantitative (for example assets, tumover/amployees) andlor qualitative characteristics {for exemple, concentration of ‘ownership and management on a small number of incividuals). What constitutes an SME differs depending on the country (IFAC 2010, 10, ie The accounting functions within an SME are broadly the same as ina large business environment. However, an SME-employed accountant may have to complete more detailed work because there will be fewer (if any) support staff. Also, the number of areas they need to cover may be wider but have less complexity compared to a large business environment. At the same time, because they will know the business and typically be very close to the ‘ownership {in fact, may even be an owner) and senior management, the professional accountant, in an SME will also often be involved in a range of business decision activities. ‘An example of the differences in the roles performed by a professionel eccountant in a large business compared to an SME is as follows * a large business may engage @ management accountant whose sole responsibility is budgeting, forecasting and reporting actual results compared to budget for one of ts ereas of operation; and ‘+ an SME may engage a finance manager who is responsible for their end-to-end accounting and finance function—with responsibilty for every function from petty cash to monthly reporting to the directors. Itis important to note that in very small SMEs, often no accountents will be employed and therefore there will be total reliance on an external public accounting practice to perform all accounting functions. >» Question 1.4 ‘Outline four possible accounting-related roles with an SME and, for ach role, identify the tasks ‘that could be undertaken in that role. IFAC research ‘The Professional Accountants in Business Committee (PAIB Committee) of IFAC ‘provides leadership and guidance on relevant issues pertaining to professional accountants in business ‘and the business environments in which they work’ (FAC 2013) The PAIB Committee in 2005 developed an information paper titled The Roles and Domain of the Professional Accountant in Business. This paper provides a description of the contemporary oles that ate filled by professional accountants in business (PALB). eve 4 | ACCOUNTING AND SOCIETY ‘The PAIB Committee described PAIB roles as: Implementing and maintaining operational and fiduciary conto, providing analytical support for strategic planning and decision making, ensuring that effective sk management processes are in place, and assisting management in setting the tone for ethical practices (FAC 2005, p. 1). ‘The PAIB Committee paper provides the following description of activities. Table 1.4: PAIB description of activities of a professional accountant Activity Examples Value Generation or creation of value through effective use of resources, through understanding the drivers of value and innovation, Information Creating, providing, analysing and interpreting information for management 10 formulate stratagy, plan, control and make decsioné, Measurement Developing appropriate measurement tools and accurately measuring performance, ‘Communication Communicating financial reports and interacting with stakeholders so they ean understand the business and make informed cholces Costing Accurate castings of praducts and services. Contiol Financial eontrl, budgeting and forecasting, end the reduction of waste through procats analysis, Risk Managing tsk and providing business assurance. Soureo: Adapted from The Roles and Domain of the Professional Accountant in Business Profesional ‘Accountents in Business Committee, 4, published by the Intornationel Fedaraton of Accountants (WPAC] in 2008 ands sad with permission of FAC, accessed October 2015, has://rermnac oc! publcatorsesources/oles and-domaia professionel secountartsbusiress, We can link these IFAC activities to the roles identified earlier and the different sizes of private sector businesses, For example, the measurement activity ina large business may be 3 management accountant measuring the performance of international freight supplier contracts In a.emall business, the measurement activity may be the financial controller determining @ breakeven sales figure In 2008, the PAIB Committee released ancther information paper titled The Crucial Roles of Professions! Accountants in Business in Mid-sized Enterprises (IFAC 2008). Understanding the role of accounting in these enterprises is vital forthe success of the enterprises and of economies reliant on such enterprises. For the paper, IFAC interviewed various accountants in mid-sized enterprises (MEs). The MEs ‘were chosen because they all had employed accountants, so the mult-dimensional role of the professional accountant as an employee could be explored. The report summarises the interviews as follows: STUDY GUIDE | 45 Generating Velue ‘The PAIBs featured in this report have identified numerous cesponsibilities that directly affect the current and future euecoss of the mid-sized enterprises in which they work ‘Their most prevalent duties hinge on helping their companies to generate value by: + establishing @ common ‘performance language’ throughout the company so that everyone's activities are aligned with the vision and goals leadership has eet; + upholding business integrity, * creating, implementing and improving management information systems to bolster strategy, planning, decision-meking, execution and control activities; * managing costs through rigorous planning, budgeting, forecasting end process improvernent efforts: ieee ‘+ managing tsk and handling business assurance; ‘+ measuring and managing performance; and + communicating financial and other performance information to internal and external stakeholders, including regulatory authorities, lenders, benkers and investors in a manner that fosters trust ‘Source: This texts an extract from The Crucial Roles of Professions Accountants in Business in Micsized Enterprizes,p. 6, Profesional Accountants n usinees Committee, published bythe cenational Fadaration of Accountants (FAC), New Yorkin 2008 andi ued with peemision of IFAC, ‘The report continues with specific observations ebout the importance of continuing self= development by the employed accountants—especially regarding communication. ‘Study Reading 1.1 ‘Profle: Roel van Veggel—The sweet sounds of success’, which is an excerpt from "The Crucial Roles of Professional Accountants in Business in Midsized Enterprises (IFAC 2008). ‘As you review this reading, identify three areas where you have added value in your own workplace. > Question 1.5 Refer to Reading 1.1. How did Reel van Veggel add value to Andre Rieu's business? The role of accountants as financial advisers Accountants are often called upon to offer financial advice to clients, who may be high net worth individuals, businesses or other entities such as trusts or foundlations. As accountants are knowledgeable and skilled about financial matters, and are able to interpret complex financial information, itis natural that clients might call upon them for investment or other financial advice beyond their normal accounting duties. However, offering financial advice has significant risks and responsibilities that must be recognised. This, again, takes a critical step away from assessing compliance within a body of rules and frameworks to actually taking complex decisions regarding the best means of financial performance. ieee 46 | ACCOUNTING AND sociETY The risks involved in offering financial advice are many. Its vital to remember Adam Smith's words: this is ‘other people's money’. That is, any risks involved in the proposed investment strategy are borne by the client, not the adviser. Moreover, if, a 2 financial adviser, the accountant becomes t00 close to certain investment funds, this poses the risk of the adviser acting out of self-interest rather than the client’ interest. The financial advice industry has been associated with these dilemmas on frequent occasions, which has led to @ number of government inquiries into the financial advice industry both in Australia and overseas, most recently as part of @ comprehensive ‘examination of the current cost, quality, safety and availabilty of finenciel services, products and capital for users in the Australian Government's Financial System Inquiry Final Report (2014). The dilemmas of self-interest conflicting with public service are most serious in the field of financial advice. The occupation of financial adviser has expended considerably in recent decades as more people have accumulated wealth that they wish to invest wisely Since accountants have extensive financial skills and knowledge, some accountants have been drawn into providing financial advice, often at the request oftheir clients. Regrettably, internationally there has been a series of scandals in which there has been widespread selling of inappropriate investment products, unacceptably high fees, and sometimes corrupt practices. This has not only occurred with individual financial ackisers, but in the past with financial advisers working for the insurance industry in the UK, and the major banks in Australia Clearly the role of financial adviser carries significant responsibilities and risks beyond those rrormally encountered in the accounting profession. It is essential for any accountant engaging in financial advice to be fully eware of the responsibilities end risks involved, and to maintain a sense of objectivity regarding the best interests ofthe client receiving the advice. Regulation of financial advisers is achieved by Regulatory Guide 146, issued by ASIC, which details minimum levels of training, competence and experience to those giving financial advice. Accountants as external advisers to SMEs Research commissioned by CPA Australia in 2005 found that accountants as advisers provided a wide range of services to the SME secior. We are referring here to professional accountants from public practice providing services to businesses in the private sector. ‘The survey reported that 97 per cent of SMEs purchase accounting services (Le. taxation advice and financial statement preparation) from an external accountant (CPA Australia 2005, p. i. Importantly, 67 per cent of SMEs identified business advice as a key service available from external advisers, CPA Australia’s survey found that 76 per cent of SMEs at some stage relied con external accountants a business edvisers. However, the survey found thet reliance on accountants for business acvice was very limited in extent and overall effect. Only 6.5 per cent of SMEs were found to place any substantial degree of reliance on their external accountant for general business advice (including managerial accounting advice). Thisis disappointing and the survey therefore indicates that external accountants have an important role in conformance (i.e. compliance) but have not been much valued in improving performance (.e. profitability} Five years later, and at an international level, IFAC (2010) found the same general trend. IFAC also clarified that itis important for external accountants (small to medium practices) to recognise the real opportunities—for the businesses they advise and for their own practice growth—that exist inthe greater provision of profit-oriented business advice rather than accepting the current overwhelming dominance of compliance advice. STUDYGUIDE | 47 > Question 1.6 Why have SMEs not relied in the past on their external accountants for business advisory services? ‘Comment on whether this might be changing or needs to change. Reflecting en your own organisation or one with which you are familiar, consider whether it relies on external accountants for advice. f not, what may have prevented this from happening? Public sector ‘The public sector includes a wide range of government and regulatory bodies. It includes the national government and lower levels including state, territory and local government. Where. governments provide for-profit services, they often set up particular entities called government business enterprises (GBEs) or state-owned enterprises (SOEs). Governments are characterised by the breadth of their powers in comparison with the private sector, such as the ability to establish and enforce legal requirements. iota] Governments and their agencies require economic, finance, accounting and audit staff for their operations and qualified professionals can build successful careers. Often people ere drawn to the government sector because of the potential for greater work-life balance, taining and dlevelooment and career progression and because they wish to ‘make a difference’ ‘Over recent yeers there have been significant cultural changes with a shift towards a more corporate model of best practice and ‘value for money’ approaches. As in the private sector, the public sector highly values commercial know-how, analytical thinking and leadership and stakeholder management abilities. ‘Accounting roles within the public sector ere quite similar to those in the private and business sector, with the requirement for financial reporting, internal audit, risk management and strategic, ‘management accounting of key importance. Not for profits (NFPs) NFPs are generally defined es legal or social entities formed for the purpose of producing goods or services, and whose status does not permit them to be a source of income, profit or financial gain for the individuals or organisations that establish, control or finance them. NFPs can vaty in size from very large charitable institutions to local sports clubs. The principal sources of income for their operations are usually receipts from members and supporters, ‘grants, donations end fundraising. Some NFPs also supplement revenue with trading activities. Although profitability is not their core purpose, NPs require sound financial management to ensure that they are sustainable, can demonstrate positive social impact and can continue to meet their objectives. The NFP sector, sometimes called the community or thitd sector, is diverse and growing. {In Australia, the NFP sector encompasses 600 000 organisations contributing an estimated AUD 43 billion, making it larger than the communications industry, agriculture or tourism (Office for the Not-for-Profit Sector 2013}. As the complexity of tendering and accountability requirements grow in this sector, so does the need for professionally qualified staff to enhance elfcieney and effectiveness. iio) 48 | ACCOUNTING AND sociETY Keeping the organisation in good financial shape, meeting the reporting requirements of a myriad of stakeholders, understanding the grants process, constructing and monitoring budgets, tendering for outsourced government services, diversifying revenue streams through new models of investment and social enterprise and meeting best practice volunteer menagement are all part of the daily mix for a finance professional working in an NFP. Social impact of accounting Itrnight be argued that all professions, because of their accumulation of relevant capabilities, have a duty to use those capabilities to improve and enhance society We can call this @ positive {or active rather than passive) social impact. Does accounting have a positive social impact? Can that impact be negative in some circumstances? Is it possible thet accounting may even change society? ‘One aspect of accounting is the important role of reporting to investors, owners, management and other users. This reporting may be designed principally to inform users about events that ‘occurred in the past, by way of annual, half-yearly and quarterly reports, and also some types of historical reports within organisations. ‘Some people might think that this reactive information is passive. However, as a result ofthis historical accounting information (created under applicable accounting standards), investors, ‘governments, managers and other stakeholders make decisions with significant social consequences. Reporting, which is reactive in respect of events, is the active foundation for 2 variety of outcomes—and these outcomes actively change social circumstances and entire societies. An example of this may be the preparation of the half-yearly results for a publicly listed company. Ifthe results are poor, there is an obligation for the company to announce this to the public. Investors may then choose not to go ahead with a plan to purchase shares in the company. financial results for a large number of companies are poor, sociely may interpret this as a sign that the economy is filing. Examples such as these show that implementing accounting systems and their constructs have 2 forceful social impact and social and economic consequences, so accountants need to understand end apply vast ‘professional capobilities' to achieve appropriate reporting in ‘each circumstance. These professional capabilities include relevant technical knowledge, soft (sometimes called ‘social’ or ‘interpersonal’ skills and extensive experience to avoid adverse consequences due to poor or inaccurate reporting, Beyond reporting about the past, accounting is commonly used within organisations to provide information to support managers in decision-making. Such information is future-oriented and is designed to facilitate, support end even to cause change. For example, a strategic management 2ccountant designing information to support 2 new manufacturing plant is change-focused, as is an accounting ‘regulator’ working on new laws or new accounting standerds designed to create changes. Ifthe reporting is right, then the social impact, erguably, willbe good, as markets and decision- makers are informed appropriately. ifthe reporting is wrong, then the social impact will almost certainly be negative. Arguably, even perceptions about accounting can create significant social impact—so communications regarding accounting need to be professional and balanced. ‘Accounting is increasingly recognised internationally and nationelly as creating changes to society, impacting individuals, business entities and regulatory agencies (including governments). The professional accountant must always be aware of their ethical obligations and the reliance society places on the information they provide. sTupycuive | 49 Social impact example—depreciation and behaviour A powerful example of how accounting has a social impact is shown by looking at how assets are depreciated. People who are not familiar with accounting may see depreciation as a technically accurate adjustment to reflect the decline in values of non-current assets. However, in realty there is @ broad scope for choice in depreciation methods. The depreciation method and estimated residual life or productive capacity will have an impact on several measures, including reported profits and asset balances, and therefore remuneration and bonus plans that ate irked to profits or return on investment. Pols ne] Impacts of higher levels of depreciation ‘+ Inthe short term, it will mean lower profits and lower asset levels. ‘+ Inthe longer term, there will be 2 rise in profits with lower assets levels. This may lead to a lower measurement base for manager against which future performance is measured— this will show a greater percentage improvement and is likely to lead to higher long-term bonuses. Lower asset levels will also lead to a higher return on assets. + Lenders may be nervous due to lower profit levels and asset values thet may be used as security, + Owners with a short-term approach may be frustrated by lower projits and consider selling thelr investment. This may lead to a decline in the shate price. Impacts of lower levels of depreciation ‘+ [twill lead to higher profits and higher asset levels, which may be the source of short-term rewards for managers. + Lenders and owners may have greater confidence levels in the organisation because of higher profits and assot valves. + Itmay reduce investments in assets in the future, as assets are assumed to have a longer lifespan than is actually the case. This may hinder the organisation's competitiveness. ‘+ When assets reach the end of their useful life and are scrapped or sold, there may be large write-offs ifthe written-down value of the asset is higher than its disposal value. From these points, we can conclude that the choice of depreciation method and residual life of the asset is not 2 'value-free' or technical choice, but one that may have a significant impact Cn different people. Because the different outcomes may have positive or negative effects, they have a social and behavioural impact on accountants, managers and users of financial reports, including lenders, owners and the broader community. This may create a situation where an accountant is pressured to report an artificial result Accounting is often perceived as neutrala set of black and white tasks performed in a mechanical manner—but this understates its influence. Rather, the activities of accountants and the use of accounting information, including the decisions that are made based on the outputs of accountants, have a decisive impact on the social functioning of individuels, {groups and entities. The impact is far wider than at frst might be apparent. Itis important for accountants to understand the potentially broad social impact of accounting at the micto and the macro level. At the macro level, this extends to all types of business, public organisations and social institutions, and society generally. At the micro level, we must Understand the potentiel impact thet accounting can achieve on the motivation and behaviour of managers and employees within an organisation The motivational effects of performance measurement are discussed in more detail inthe ‘Strategic Management Accounting’ subject of the CPA Program. Vio a] 30 | ACCOUNTING AND sociETY Credibility of the profession For accounting to continue to be regarded s 2 profession, itis important that itis perceived to provide a public service and contribute to effective governance of organisations, large and small, public and private, (Our technical actions and behaviours as accountants ere under scrutiny. The way we act and the work we perform have @ significant impact on organisations and society. As such, when we fail to perform our work to an adequate standard and organisations experience trouble and distress, the credibility of the profession is called into question Credibility under challenge ‘Some authors argue that the credibility of the profession has declined because of several factors including accuracy of financial reporting, corporate failures, auditor independence and a lack of audit quality. For example, Brewster (2003) documents the loss of trust in the accounting profession curing 001 and 2002in How the Accounting Profession Forfeited s Pb Tus ‘Accountants and aucitors who have not performed their oles effectively are seen as responsible for the failures and inaccuracies that have led to the decline in crecibilty. The view is that the accounting profession did not fulfil its service ideal role as it did not prevent these situations by giving appropriate advice to menagers and/or making appropriate disclosures. Following the many corporate collapses of the late 1980s and the market collapse of October 1987, many efforts were mace to make accounting standards more consistent—and these efforts continue today. Despite these efforts, there have been a number of high-profile corporate failures in the past 15 years, including Enron, WorldCom and Lehman Brothers (US), Babcock & Brown and HIH Insurance (Australia), Parmalat (italy), and Equitable Life Assurance Society (UK These failures have again pleced the accounting profession under extensive scrutiny. Key issues causing reduced credibility Other core problems affecting the credibility of the profession are outlined below. These were highlighted during the corporate failures of the early 2000s as well as during the GFC. Creative accounting ‘Creative accounting’ means using the choices available to present information in ways that do not clearly represent reality, and which provide a distorted and often favourable view of the organisation Many accounting issues from the 1980s remain unresolved, including practices such as, cepitalisation of interest expenditure, financial instrument valuation and risk management, formation expenditure being treated as an asset, mining exploration expenses regularly being capitalised and related party transactions. The words of Chambers, writing in 1973, are still current: If due to the optional accounting rules avaiable to them, the company managers and directors are able to conceal the din financial postion), shareholéers end creditors wil continue to suppor, and support with new money, companies that are weaker than their accounts represent them to be (Chambers 1973, p. 168) stupyGuipe | 31 Chambers could just 2s easily have been writing about 2001 and 2002 oF about the valuation of sub-prime debt and complex financial instruments from 2007 to 2009, Poor audit quality Poor audit quality refers to the perceived inability of auditors to ider prior to collapse. ‘a company in distress ‘The GFC also saw auditors become subject to increased scrutiny (e.g, see Durkin & Eyers 2009; Eyers 2009). GFC corporete failures have demonstrated valuation failures especially in relation to financial instruments and these veluation failures have raised questions about the role and velue of auditing (Sikka 2009; Sixka, Filling & Liew 2009; Woods et al. 2007). MODULE 4 In view of the massive financial bail-outs of many prominent corporations around the globe, Sika observed that: Many financial enterprises have sought state support within a short period of time of receiving unqualified aucit opinions. This rises questions about the value of company audits, auditor independence and quality of aust work, economic incentives for good audits and the knowledge base of auditors (Skke 2008, p. 868) Lack of auditor independence ‘Another issue is lack of auditor independence, where conflicted auditors do not act in the public interest. Sikka, Filling and Liew (2008), for example, expressed a perennial view of the basic auditing model, that i, its flawed since it makes auditors financially dependent on companies’. Consequently, according to Sikke's view, auditors will not give objective independent professional judgments because their incomes depend on the survival of the aucit‘terget’. Case Study 22 in Module 2, ‘Arthur Andersen’, explores this issue in detail Financial accounting distortions ‘Accounting has played a role in triggering financial distress, especially with mark-to-market techniques that reduce asset values, and ray lead to breach of banking covenants or even default thas been proposed that the GFC was at least in part caused by ineffective accounting standards for complex financial instruments. The role of risk, along with the failure of the various decision-makers to understand risk and the true nature of ‘complex financial instruments’, has also been a key factor. The fact that accounting standards did not help has been a matter cf professional concem for accountants. It is worth noting that IFAC commissioned a study in 2002 to look at the loss of credibility in financial reporting and approaches to resolving the problern. Critical matters that were identified in the study include: + the payment of incentives that encourage the manipulation or misstatement of information; + lack of actual or perceived auditor independence; + lack of audit effectiveness both through lack of skill or deliberate action; and, + 100 much flexibility and loopholes in reporting practices (FAC 2003. ioe 52 | ACCOUNTING AND sociETY Case Study 1.1 demonstrates several of these issues as they relate to the collapse of ABC Learning, Case Study 1.1: The collapse of ABC Learning A strong example of misreporting, auctor failure and uncontrolled management changes to accounting figures isthe 2008 case of ABC Learning, The accounts of ABC Learning Centres were altered to add milions of dollars of possiste revenue, ast struggled to stay float in the months before it $1.6 billion collapse more than a year ago, AAC Learning's former acting chief financial officer, John Gadsby, told the Federal Court in Sydney yesterday that in mid-2008, as the group battled mounting debts, the company’s internal accountants were instructedto prepare a cashflow statement forthe rest ofthe year. The document was to be given to the company’s syndicate of banks as part of negotiations to extend financing and keep ABC Learning afloat. The original cashflow statement, referred to in court as ‘the first cut’, shoned the group did not expect to receive any ‘compensation fees’ paid to ABC Leamning Centres from childcare centre operators and developers from June to December 2008, However efterit was reviewed by former chief executive and founder Eddy Groves, a “second cut’ of the statement showed there could be $44.79 million in fees received over that sb- month pet The court was tolé there ware other substantial changes madi to the ‘fst cut, Including an increase in the value of childcare payment receipts from parents in that time (Murdoch 2010). In May 2013 the former CFO was charged with providing false or misleading documents to the company’s auditors Auditor failure Pitcher Partners were the auditors for ABC Learning during the 2007 period. However, due to the company’ oversees expansion, Pitcher Partners indicated it would no longer conduct the auclts 50 Ernst & Young took over the aucit work for the 2008 financial year. Ernst & Young then made the radical decision to reject the previous accounts based on, amongst other issues, e disagreement with particular accounting treatment of revanue items. In August 2012, Simon Groen, the company's former Pitchor Partners auditor was suspended from audit work for five years It was Green's failure to adequately and properly perform his duties as an auditor when conducting the cudit ofthe 2007 financial report thet led to this suspension. Specifically, Green didnt cbtain encugh evidence to confirm the correct treatment of fees, which led to an overstatement of fees, nor to establish whether the company was a going concern (Kruger 2012) ‘As we look at corporate failures over the last 30 years, it appears that too often the independence and professional ethics of accountants failed. Instead, professionals left behind their standards in the hope of becoming pert of an economic revolution related to booming share market growth. The decede beginning with the failures of 2001 to 2002 has seen the ‘profession come under scrutiny to an extent never previously seen, ‘The credibility of accounting as @ profession of value has been very much ‘on the line’ ‘Arguably, there has been a diminution of public trust in the profession's service ideal and a reduction in its former degree of autonomy and independence. We now consider the response of the professions and government to restore credibility to financial accounting, auditing and the accounting profession itself. sTuoy GUIDE | 53 Restoring credibility to accounting Pressure from governments, the investor community, professional accounting bodies and others have resulted in a number of measures aimed at reducing the likelihood and severity of the corporate failures that have occurred in recent times. Examples are given below. Establishment of the Financial Reporting Council. As detailed earlier the Australian ‘Accounting Standerds Board (AASB) and the Australian Auditing Standards Board (AUASB) are no longer controlled only by the professional accounting bodies. They are controlled by the Australian Financial Reporting Council (FRC), a government body set up to oversee the effectiveness of financial reporting, ‘Accounting standards are backed by law. Accounting standards are externally created and ‘enforced by regulations, meaning non-compliance by a professional accountant can mean both isciplinary action from their professional body and legal penalties. ier Auditors must apply the code of ethics. The Compiled APES 110 Code of Ethics for Professional Accountants also has legislative application to auditors. FRC responsible for auditor independence. The FRC now has direct responsibilty for monitoring the effectiveness of auditor independence. This reduction in autonomy is ikely to lead to greater comfort in the community and less opportunity for abuse by auditors. As a result, this change should help to restore and maintain professional auditor crecibilty in the future. Enhanced regulation. New laws, regulations and guidance have also been developed globally, including the Sarbanes-Oxley Act 2002 in the US, COSO 2004 (discussed in more detail in Module 3), and the extensive process leading to the CLERP 9 Actin Australia Adoption of international standards. Since 2004, many counties have edopted, or are in the process of adopting, common international standards on accounting, auditing and professional ethics. » Question 1.7 (Outline reasons why the four key issues identified by IFAC (2003) would reduce the profession's credibiity. What strategies may be useful at reducing or eliminating these problems in future? ‘The reduction of the profession's autonomy {in terms of setting its own rules and guidelines) is one change that is leading to restored credibility as externally enforced legislation and tules provides greater protection and comfort to users of accounting information and society in general. Individual accounting bodies, such as CPA Australia, have also been active with various initiatives in support of improved financial reporting, enhanced auditing stendards and more effective governance. The Corporate Governance Council of the Australian Securities Exchange, the OECD and the UK Financiel Reporting Council have also undertaken much work. To restore credibility the underlying problems must be identified and practical measures put in place to reduce or eliminate them. The measures described above aim to reduce the likelihood of past issues being repeated. IF these aims are met, they will help alleviate society's concems and provide reassurance that these issues will not happen again. Success will require the utmost application of all the relevant, professional capabilities that a professional accountant must possess. Vols 54 | ACCOUNTING AND socieTY Capability considerations So far, we have been discussing the broader eccounting profession, what it means to be a professional and the issues the profession has been facing. Professional accountants are expected to understand their professional responsibilities and apply themselves diligently to achieve and maintain these standards. As such, they have @ role to play in improving the «credibility of the profession, ensuring the public interest is served, and making sure clients, ‘employers and the broader community beneft irom their skills, knowledge and decision-making, ‘The CPA Program is large component of developing technical knowledge to attain professional status, However, its also important to develop 2 broader range of sills. The pathway to becoming CPA includes professional mentoring end achieving rigorous technical knowledge requirements, combined with broader business knowledge and so#t skills including communication and leadership, Managing oneself is fundamental to successfully achieving professional status, end so personal effectiveness becomes another foundation for a successful cereer. Business leadership capabilities Professional accountants are well-placed to attain leadership roles within society. These leadership roles may be as a partner in a professional practice, chief financial officer of a large enterprise or con the board of 2 company or notor-profit organisation, Leaders are required to develop the strateay, drive the change and align the organisation's structure, resources and culture with strategy. Leadership requires vision, energy and drive from the professional accountant, the desire to be strategic and to be a key contributor to the improvement and strategic growth of the organisation. As business leaders, and as professionals, ‘accountants must exercise a high degree of competence and due cere, and hove a protessionel obligation to service ideals We discussed earlier that professional competence requires not only strong technical accounting skills, knowledge and experience, but also the desire to actively enhance our professional expertise and insights through the acquisition of diverse new skills, knowledge and experience. Professional capabilities arise over a relatively long time frame, through the steady eccumulation of al the relevent skills, knowledge and experience. As the professional accountant enhances. their skills, knowledge and experience, they enhance what they can offer society, and in particular their readiness to be leaders in society. ‘As mentioned earlier in this module, the skills, knowledge and experience of a professional accountant can be broken into the two key categories of technical sills and soft sills Both are vitally important and itis @ mistake to concentrate on one at the expense of the other. Professional capabilities are not simply skils, knowledge nor experience on their own. Rather, professional capabilities arise over a relatively long timeframe through the steady accumulation of al the relevant skills, knowledge and experience. There is no clear definition of when we become professional, but arguably an individual can be regarded as professional when that individual has sufficient capabilities to meke complex and difficult professional judgments and effectively advise others in respect of those judgments. STUDY GUIDE | 55 Technical skills, knowledge and experience From your study and employment, you will have a good understanding of the technical skill, knowledge and experience (TSKE) that relate to general accounting activities, including {but not limited to} + financial reporting: + taxation; + finance and financial analysis; + management accounting; ‘+ relevant IT and technical communications knowledge; and + an understanding of regulations, laws and company structures, ‘The degree of TSKE required varies according to the tasks being undertaken by the accountant. For exemple, an accountant functioning as a company secretary (called ‘public officer’ in some jurisdictions) for a publicly listed entity must have a strong awareness of financial reporting requirements and the local stock exchange listing rules. MODULE 4 ‘Some accountants will have TSKE regarding intemal audit, external audit and forensic accounting, Technical requirements will depend on the field of work and the level of detailed skills and knowledge required, Soft skills, knowledge and experience CPAs must also possess extensive soft skills, knowledge and experience (SSKE}. SSSKE is primarily (some might say is all) bout people and related issues. More specifically, professional accountants need well-developed social skills and capebilties, Including the ability to: + listen; + understand complex and ciffcult issues and their role in the decisions and information needs of others; + communicate effectively (both verbally and in writing): + discuss and debate without hostility—a vital aspect of interpersonal skills; + persuade and convince based on logical and reasonable argument—another vital aspect of interpersonal skills and an important part of leadership: + manage time; + meet deadtines; and + build and improve our capabilities. TSKE and SSKE—career perspectives ‘CPAs are subject to formal continuous professional development (CPD) learning requirements. CPA Australia recognises both TSKE and SSKE activities as satisfying CPD requirements, acknowledging that lifelong learning for both activities is vital for professional accountants. Professional career progression, advancement and promotion within employment, along with higher status in the profession (as @ person becomes @ CPA and then an FCPAY, are all functions ‘of demonstrated improvement in TSKE and SSKE capabilities. Staff from the University of North Carolina (Blanthorne, Bhamornsiti & Guinn 2005} reported that TSKE are relatively more important in the early years of professional accountants’ actual careers bbut, as time passes, and TSKE and SSKE improve and as some CPAs move to partnership (and/or senior management) level, SSKE becomes relatively more important in career progression. MODULE 1 36 | AccounTiNG AND socieTY {n fact, Blanthorne, Bhamarnsiri and Guinn (2005) found that CPA firms, when selecting candidates for early career promotions, regarded technical skills of candidates as the most important evaluation criterion {renked frst on alist of six ranked appointment criteria. However, when seeking promotion later in their careers {promotion to partnership level), the research found thet technical skills moved to fifth place in the six items. Further, the ‘interpersonal’ soft skill moved from its previous third place (for early career appointments) to first place, with leadership in second place and communication in third place. for partner appointments ‘This demonstrates that accountants need to have @ strong foundation of technical skill, but that building relationships, interacting with staff and clients, and leadership skills are required to further thelr careers, Reading 1.2, ‘How “soft skills" can boost your career’, is from 2005 and is still relevant, It is valuable in further discussing attributes of soft skills and how these can be important in successful career development. You should study this now. Career guidance system CPA Australia has developed a career guidance system which assists members to evaluate their professional development needs based upon their interests, the requirements of their role, and their long-term career goals. Members can assess their current level of competence in the desired areas and, with the aid of the assessment tool, determine the appropriate professional evelopment tools to enable ther to achiave their goals The Career Guidance System identifies four sill areas: + technical sills; © business skills; + personal effectiveness skills; and + leadership skills The Career Guidance System provides an interactive tool on the CPA Australia website at:

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