2QuestionWhat are the practical differences in the accounting for a change in estimate and a correction of an error? Why might managements prefer one approach to another? What pictures do the two accounting presentations paint for readers outside the company?
3Answer (#1)A change in accounting estimate requires disclosure in the current year’s financial statements with no restatement of the prior year’s financial statements included in the annual report for comparability. Contrary to a change in accounting estimate, a correction of error requires that the current year’s financial statements be adjusted and also demands that the appropriate disclosures be made concerning the error. A correction of error further requires that the prior year financials be restated.
4Answer (#1)Management’s main goal is to maximize profits and keep earnings appealing to their shareholders in order to boost investment and compete in the market. This being said, management always wants to send positive signals to its shareholders and avoid restating the prior years financial statements. As explained above, a correction of error requires restatement of prior year statements, thus sending a negative signal to investors. That signal might be interpreted as a negative one in relation to investor share value.
5QuestionConsidering the fact that the corporate controller is only one of several officers of a company, and not the most senior officer, where do his or her responsibilities begin and end regarding the company's financial statements? Does the controller have a different responsibility for the financial reports than the Vice President of Manufacturing, for example?
6Answer (#2)The controller is ultimately responsible for carrying out the financial plan set forth by the CFO. Furthermore, it is the controller’s responsibility to assure that the company follows all pertinent reporting rules and regulations to conform to GAAP and implement accepted accounting principles.
8Answer (#2)A controller’s responsibility is much different than that of a VP of merchandising or operations in that the controller is the only person that should have the final say on the management of funds. Other functional areas in a company are merely given budgets which they can manage; they have no direct impact on the financial statements. Granted, the actions of top management in other functional areas affects a company’s financial performance, however, they do so by affecting the areas which they manage, which in turn, impact financial performance.
9QuestionWhere should the controller's loyalties lie where there is a conflict between the interests of management and GAAP reporting? Does the controller have a different responsibility to the public than the Vice President of Manufacturing, for example?
10Answer (#3)An auditor is generally defined as an officer who audits accounts and supervises the financial affairs of a corporation. He or she acts as a regulating agent for that corporation
11Answer (#3)A controller, especially if a licensed as a CPA, owes loyalty to a body that transcends management and the corporation: the public who believes in the corporation – by extension – believes in the direction management is taking that corporation. The public is protected by auditing standards and principles that require integrity, independence and fair representation of financial position, results of operations and cash flows of an organization.
12Answer (#3)Management can not often be trusted to forego its goal of meeting earning forecasts because its survival depends on it
13QuestionWould your answer to the above question be different if the controller was or was not a CPA? Where might a controller look for guidance, for help in managing a conflict between his or her perception of what GAAP requires and what the rest of the management team believes to be in the best interest of the company?
14Answer (#4)Whether a CPA or not, a controller assumes the same responsibilities. Being so, one can and should expect delivery of the same professional care and adherence to authoritative standards.Sources of guidance for solving accounting conflicts can beThe external auditorsThe hierarchy of the US GAAP
15QuestionIn your opinion, what is the theoretically correct answer? How might that answer be helpful or hurtful to the company? For Mr. and Mrs. White? For the other members of the management team? For the existing stockholders? For any potential new stockholders? If some are hurt and some helped, how should that conflict be resolved?
16Answer (#5)FASB 16:“Accounting Principles Board Opinion No. 9, paragraph 23, limits treatment as a prior period adjustment "to those material adjustments which (a) can be specifically identified with and directly related to the business activities of particular prior periods, and (b) are not attributable to economic events occurring subsequent to the date of the financial statements for the prior period, and (c) depend primarily on determinations by persons other than management and (d) were not susceptible of reasonable estimation prior to such determination."
17Answer (#5) Interpretation of FASB 16: Since the actual entries that inflated revenue and receivables could not be specifically identified and could not be tied to specific period, the charge should have remained as a “correction of errors” on the revised statements.
18Answer (#5) Negative Effects: Positive Effects: LOSS OF CREDIBILITY Potential new stockholders – increased confidence from effective change in managementNegative Effects:LOSS OF CREDIBILITYPOSSIBLE LITIGATIONCompany – reduced earnings and profitMr./Mrs. White – reduced profit from sale of stockManagement – lower compensation (as related to income)Stockholders – devaluation of stock
19QuestionWhat should Mr. Field do, once he has finished his cup of coffee?
20Answer (#6)He should take the statements back into John Harvey’s without signing them and resign effective immediately. Mr. Field tried going through both management and external audit – both attempts failed. Mr. Field should get out with his hands clean before he could become liable for any wrongdoing and risk the chance of losing his license.