Free Essays

How did the successive stages of capitalism change the UK’s accounting and financial reporting processes?

1. Introduction

At the beginning of the twentieth century, Sombart (1916) asserts that the appearance of double-entry bookkeeping is indispensable element of the emergence of capitalism to a large extent. This argument arouses a wide-ranging debate during that century. Some scholars who have interesting in Sobart’s writing (such as Weber, Bryer, Chiapello and so on) continue to deeply research the relationship between accounting history and evolution of capitalism. Although Chiapello (2007) states that the concept of capitalism originates from accounting concepts and it represents the situations which accounting impacts on economic problem or social realities, a number of scholars like Edwards and Arnold and McCartney admit and stress the development of capitalism also have lots of positive impacts on accounting history contrarily. To be more specific, it is the situation that with business activities developing gradually, capitalism tends to transform its types accordingly. Whilst, developments of business lead a number of accounting problems, which changes a wide range of detailed accounting practices. Moreover, it seems that the evolution of capitalism exerts significant effects on the history of accounting indirectly. In general, the development of accounting and successive stages of capitalism might have some correlation or interaction to each other.

2. A review of capitalism

2.1 The concept of capitalism

The notion of capitalism appears in the 19th century. The definition is: “This sophism consists of perpetually confusing the usefulness of capital with what I shall call capitalism, in other words the appropriation of capital by some to the exclusion of others. Let everyone shout “Long live capital”. We shall applaud and our attack on capitalism, its deadly enemy, shall be all the stronger.” (Blanc, 1850, quoted by Deschepper, 1964, p. 153). Then, Proudhon gives another concept of it as “Economic and social regime in which capital as a source of income does not generally belong to those who implement it in their own work” (quoted by Braudel, 1979, p. 276).

In addition, Weber (1991, p. 297) defines it as: “The most universal condition for the existence of modern capitalism is, for all large lucrative businesses supplying our daily needs, the use of a rational capital account as standard”. He does not stress on how crucial the concept of accounting is in his definition of capitalism, instead, he just give the notion of capitalism by capital account. Then, Chiapello (2007) asserts that Weber’s viewpoint about ‘rational organisation of free labour’ becomes the central element of capitalism as some writers acknowledged.

Moreover, Sombart (1930, p.4) suggests that ‘Capitalism designates an economic system significantly characterized by the predominance of “capital”. And he admits Marx discovered this phenomenon before in fact. It is crucial that ‘economic system’ which comes from Sombart’s writing should be discussed seriously due to the notion of capitalism could be understood better. Eventually, according to Chiapello (2007) states, economic system consists of a spiritual attitude, an organisation mode and a technique, which is called ‘a mode of providing for material wants’ as Sombart defines.

In short, although capitalism has its definition, most of people do not mention this word in the 19th century. Marx used to employ the word of ‘capital system’ or ‘capital production’ instead of using capitalism. Afterwards, in the 20th century, capitalism becomes the opposite of socialism either on intellectual areas or political sections (Chiapello, 2007). And he also claims that after Sombart popularised the concept of capitalism in 1902, Marxist vocabulary absorbs the word to describe various economic steps. Although Sombart’s opinion is heavily influenced by Marx, he emphasises on analyse the essence of capitalism itself instead of class struggle (Chiapello, 2007). However, Sombart considers the concept of capitalism as an accounting problem, but his assertion is confined to Marx’s statement to a large extent.

2.2 The stages in capitalism development

Wilson (1995) classifies capitalism in Britain into two stages. Firstly, traditional capitalism is regarded as the first stage. Traditional form is a kind of personal management method which a business performance is decided by an individual or small group of partners to a large extent. For instance, as Mantoux (1928) claims, the first industrialists generation who appeared in late eighteenth century in Britain performed numeral management functions such as to be capitalist, manager and salesman at the same time.

Secondly, managerial capitalism is considered as the second stage of capitalism. Managerial form emphasises on the separation of ownership and control in the enterprise. In the beginning of this stage, functional management and the impact of outside institutions such as securities exchanges become increasingly important for business. However, managerial capitalism tends to split ownership and control completely eventually. It means that most of stockholders will not participate the daily operation of company, whilst, the corporation will be run by professionals from various angles of management like strategic, functional and operational.

Compared with two stages of capitalism which identified by Wilson (1995), Sombart (1930) maintains there are three periods in the evolution of capitalism. They are early capitalism (from the 13th to the middle of the 18th century), full capitalism (from the middle of the 18th century to the ?rst World War) and late capitalism (since 1914) respectively.

3. A review of accounting

3.1 The concept of accounting

The American Institute of Certified Public Accountants(AICPA) defines the notion of accounting as ‘Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof’ (citied in Grady, 1965:2). In addition, Sanders, Hatfield and Moore (1938) claim that preparing statements to various parties who need useful information to make economic decisions is the function of accounting. Then, Parker (1994) gives the definition of accounting history: ‘The study of the evolution of accounting thought, practices and institutions in response to changes in the environment and the needs of society, and of the effect of this evolution on the environment’(Macmillan Dictionary of accounting, Macmillan Press, London, 1984, P.5).

As Edwards and Newell (1991) claim, accounting history is solely useful for making contribution to economic problems and business history. However, Miller et al (1991) state that it is vital to recognize accounting not only as an economic technique or a specific outcome but also as a media which changes socio-economic situations. Additionally, according to Hopwood (1983), various accounting modes are tightly connected with organisations and social realities. That is to say, before understanding what is organisation and society, it is necessary to know the notion of accounting. Generally, accounting includes the economic measurement skills which are determine by social realities and accurate calculation approaches (Bryer, 2005).

3.2 The stages in accounting development

Edwards (1989) points out the development of accounting can be divided into four stages. He claims these periods are the pre-capitalist period, the commercial capitalism stage, industrial capitalism period, and the financial capitalism stage.

Pre-capitalism period is regarded as the first stage of accounting development (Edwards, 1989). It witnesses a long period from Mesopotamian civilisation to the end of the ‘dark ages’ (4000 BC – 1000 AD). Original record keeping is viewed as a tool to document Mesopotamian trade into a form which tend to be understood by illiterate community appropriately. Records are displayed by vast number of forms such as knotted cord, clay tablets, papyrus and paper. The purpose of record keeping is to monitor the change of merchandise and cash in order to calculate rudimentary profit. At that time, individuals who are correlated with politics, religion and military affairs tend to accumulate wealth commonly. Numerous accounts which reflect records of stewardship are remnants from Greek and Roman times.

According to Edwards (1989), the second stage is commercial capitalism stage which lasts during the subsequent 760 years. Commercial capitalism, also called mercantile capitalism, is a business mode which invests the majority of capital in stock. To be more specific, it means that except shipping and mining industry, most entrepreneurs not tend to spend money on fixed assets or operating equipment instead of obtaining more inventories. Due to most of investment are short term investment, capital in business is viewed as ‘circulating capital’. Moreover, it is worthy to mention that during this period double entry bookkeeping is created approximately in 1300 and it becomes increasingly prevailing instead of using charge and discharge accounting.

Edwards (1989) claims that industrial capitalism is the third stage. British industrial revolution occurred between 1760 and 1830. Abraham Derby and his high quality iron ore is the pioneer of this revolution in the early eighteenth century. But, indeed, in the second half of nineteenth century, using machines in manufacturing industry indicates the start of industrial capitalism. Owing to the low infant mortality and the enclosure acts lead to the emergence of abundant labour resources, manufacturing is the major source of income finally during that period. Whilst, single entry accounting and double entry bookkeeping tends to be chosen by industrialists. Although charge and discharge accounting dominates for a long period until 1800 and the process of altering methods is slow, double entry accounting system become dominant in England eventually.

Financial capitalism stage which is dominant since 1830 is the fourth stage as Edwards (1989) stresses. In the industrial revolution period, to a large degree, financing does not rely heavily on fixed capital like it used to and whilst the requirements of public utilities become the original stress for capital. Along with the rapid growth of public utilities such as railway building and gradual maturity of business like promotion of mechanical inventions in the eighteenth century, accounting problems become increasingly serious, complicated and common in corporation daily operations. Ultimately, it seems that government modifies the regulation which is connected with business activity to adapt those changes. Moreover, demand of required financial data and procedures of financial reporting also changes, which leads managers can freely choose diverse methods to operate company accordingly.

4. The relationship between capitalism and accounting especially in Britain

As Wilson (1995) states, along with business history developing gradually, the history of the transition to capitalism has been offering a dynamic insight from it. Moreover, Bryer (2000) complements that it is crucial for individuals to pay attention to evolution of capitalism as well as to accounting history. And he also stresses that to explore the history of accounting, historians should preferential consider the part which is closely connected with the transition of capitalism. Chiapello (2007) suggests that the notion of accounting deeply affects the concept of capitalism. He also claims that the notion of capitalism is tightly connected with performance of economic life which is impacted by the view of accounting. Arnold and McCartney (2008) state that as an external form of accounting, financial reporting is created and influenced by the evolution of capitalism especially in the industrial revolution period. Moreover, they stress that accounting calculations is a visible segment to witness the transition from feudalism to capitalism. However, the opinion that notion of accounting is the central part in the capitalism concept is not explained by Weber (1991), instead, he just uses the capital account to make definition of capitalism.

4.1 Double-entry Bookkeeping (DEB)

Double-entry bookkeeping is the essential part for Sombart’s writing to analyse the correlation between accounting and capitalism. According to Edwards (1989), the single entry is the elementary account-keeping system which is in use in the 11th century. It works well when it is selected by small company. On the contrary, it meets some problems when firm have an expand tendency of their transactions. Generally, it seems that due to increasing transactions leads to disorder in management, unsystematic records impose restrictions on the development of business size apparently. Consequently, double entry method is produced to create accounting innovation in 1300 approximately. Moreover, he also states that with the number and frequency of trade increasing quickly, using double entry method becomes prevailing during the seventeenth century.

Indeed, the treatise which is published by brother Luca Pacioli in 1494, is regarded as “the first scientific system for DEB in which all previous empirical discoveries were theorized into a coherent, comprehensive representation” (Sombart, 1992, p. 21). Then, according to Chiapello (2007), 1608, which is the publish date of Simon Stevin’s textbook, is considered as the first presentation of the concept of closing annual accounts and establishing a balance sheet in the DEB period.

As Sombart (1992) stresses, DEB is a system that each entry tends to include two accounts. That is to say, one account should be represented as a debit and another should be shown as credit. He also claims that if company can apply DEB, their accounts should inseparably and tightly interconnected. There are three main merits of double entry bookkeeping as Edwards (1989) suggests. Firstly, it requires the accounts and information to be more careful and accurate from clerical work. In addition, it is more difficult for individual to tamper with account books for the sake of covering deceit or stealing. Thirdly, it supplies the arithmetic check which calculates from balancing the account books termly. On the whole, it is essential for DEB to trace, quantify and record every individual account and every transaction in the whole company development process (Sombart, 1992). According to Edwards et al (2009), DEB is not only a calculative method to assess capital return, but also can provide available information to performance valuation and decision making. As Winjum (1971) complements, DEB is the fairest and suitable method to select.

4.2 Canal industry and railways in Britain Industrial Revolution

Bryer (2005) admits that Britain Industrial Revolution (BIR) in the late-eighteenth century is a capitalist revolution such as ‘a revolution in the dominant social relations and calculative mentality’ as Marx’s asserted in his theory before. Moreover, he also claims that owing to realize the implications of changes of economic and social issue, Marxist accounting history of the BIR is trying to find the position of accounting in historical situations which consists of social accountability and variations quickly.

How to extract surplus value from labour is the biggest difference of production between feudal and capitalist mode and their accounting methods accord with various modes accordingly as Bryer (2000) asserts. Bryer (2005) states that use of factories, machines and accounts stands for starting of industrial revolution. He also asserts the form of balance sheets and profit and loss accounts is crucial to employ because the capitalist extracts residual value which is made by wage labour to obtain return on capital employed. However, other writers like Watts (1977) argue that financial statements is required by outside investor to decide their economic decision which originates from agency theory. It is remarkable to two specific periods in BIR, which can provide a better analysis of the relationship between accounting and capitalism. Two periods are presented as follow:

4.2.1 Canal industry

As Bagwell and Lyth (2002) states the first canals were built in the late eighteenth centuries and the recent civil engineering was shown by canals building. According to Arnold and McCartney (2008), canal age in Britain starts at 1755, in order to make Sankey Brook which is a tributary of the Mersey navigable, Liverpool company gains an Act and tries to transfer coal from the St Helens area to Liverpool by water. And this action promotes the Bridgewater canal which from Manchester to Worsley. As Bagwell and Lyth (2002) point out, after the canal opened in July 1761, the coal cost declines dramatically. Afterwards, this success leads a better alternative of Manchester Runcorn Canal to be applied in 1767, and the carriage levies also obtains a sharply decline (Arnold and McCartney, 2008). They also argue that new canals are not only a freight tool but also can be considered as a chargeable transportation form for individuals. Hadfield (1981) stresses that inland navigation system in England and Wales builds canals 1,482 miles in 1760, and the navigation length in 1830 increases significantly to 3,969 miles. The period is normally regarded as industrial revolution period coincidently.

After south sea company bubble, “Bubble Act” proposes some constraint to joint stock firms (Arnold and McCartney, 2008). But, costs of building canals not tend to be afforded by individual firm, family or local group. Consequently, the first corporation, also named as “The Company of Proprietors of the River Dun” , as Arnold and McCartney (2008) suggests, is built in 1733 under circumstance of Navigation Act and raises ?17250 by shares. That means the company of proprietors of the river dun and succeeding canal corporations are first “statutory companies, for trading purposes” and some companies are limited liability (Harris, 2000, pp.98-9). Generally, Bagwell and Lyth (2002, pp.12) states that canal companies make a tremendous contribution to future industrial development “by popularising the sale of equity shares, bonds and debentures”

From accounting perspectives, although those canal companies have some financial data like cost of construction and paid dividends, they still search some financial documents like periodic accounts and financial reports to know company’s profitability instead of just providing company books to shareholders (Arnold and McCartney, 2008). Then, the directors of Kennet and Avon maintain construction costs should be recorded as “a true and particular Account” after Rochdale and Lancaster canal directors claimed they need “proper Books of Accounts” (Kennet and Avon Canal Act, 1794, sec.114). They stress that it should “cause a true, exact and particular Account [of income and expenses] to be kept and annually made up and balanced”. Subsequently, the data set of the Birmingham, Kennet and Avon and Oxford canal companies includes ledgers and journals records, and whilst they use DEB method. In short, Arnold and McCartney (2008) maintain that it is apparent that Kennet and Avon’s “General Account” is primary form of the General Balance Sheet, even though it does not mention accrual depreciation asset, acquisitions record either in capital account or in operating statement as expense and it is single periodic operating statement which is based on cash or near-cash accounts.

4.2.2 Railways

Bryer (1999) claims that railway which is the central industry of economy in the 19th century exerts noteworthy impacts on financial reporting and accounting practices. As Arnold & McCartney (2008) suggest, the opening event of Liverpool and Manchester railway in Britain in 1830 is the symbol of the emergence of financial capitalism. And it also is the original model for limited liability enterprise. Afterwards, it leads the appearance of “arms-legth” investment, limited liability firm, the separation between ownership and control and following accounting adjustments as Arnold and McCartney (2008) stress. Edwards (1989) agrees with that, and he states that London Stock Exchange proofs the contribution of railways to the growth of capital market in the financial capitalism period.

According to Edwards (1989), at that time, owing to railway building needs lots of money involved, it is impossible to start a part of program with insufficient cash and then wait for reinvesting from retained profits. That is to say, it is necessary to ready all the resources before commence activity. Consequently, it is crucial that financial data is required urgently to ensure whether or not the project is workable, to observe all the cost which happened in construction, and to conclude and report detailed accounts in the whole process. Indeed, these requirements in reality lead numerous accounting problems should be pay attention. Edward (1989, p.13) mentions those problems are: ‘the separation of capital expenditure from revenue expenditure; the valuation of fixed assets; the calculation of periodic profit; and the appropriate form and content of financial statements published for absentee owners’.

5. Conclusion


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Free Essays

International Accounting Issues

1. Executive Summary:

Due to the global business expansion, management opportunities have grown and enhanced each day and issues and abuses have occurred. Therefore, I will try to explore how Earning Management works within finance and, will relate it with the principles of accounting. According to the IASB, there are many ways escape and create opportunities. Throughout my study I will present how a total impact is made, by explaining the different accounting standards and by relating them to Earning Management.

2. Earning Management:

Earning Management is the practice of producing financial accounts that suit a particular purpose without really showing the true and fair views. Sometimes the accountant might want to show profits which are favorable e.g. to get a bonus, and sometimes losses e.g. to pay less tax. At other times the accountant may wish to show a healthy balance sheet e.g. to get a bank loan, whereas at other times an unhealthy balance sheet e.g. before a management buy-out to get a bargain. Various types of definitions have been produced to explain Earning Management as a special form of ‘’design’’ rather than ‘’principled accounting’’.

2.1 Definitions of Earning Management:

Earning management is also referred to as income smoothing, earnings management, earnings smoothing, financial engineering and cosmetic accounting. Definitions of earning management vary, and include the following:

‘Is any action on the part of management which affects reported income and which provides no true economic advantage to the organization and may in fact, in the long-term, be detrimental’. (Merchant and Rockness, 1994)

‘Involves the repetitive selection of accounting measurement or reporting rules in a particular pattern, the effect of which is to report a stream of income with a smaller variation from trend than would otherwise have appeared’.(Copeland, 1968)

2.2 Motivations for Earning Management:

Why earning management comes into beingHow can earning management come into beingIn this part motivations of the appearance of creative accounting will be worked over.

To Show Growth Trends:

Generally companies prefer reporting steady trends of growth in profit rather than showing volatile profit with series of dramatic rises and falls. Making unnecessarily high provisions for liabilities and against asset values in good years is achieved so that the provisions can be reduced thereby improving reported profits in bad years.

Directors Bonuses:

In most cases, bonuses of the management of the company are based on profits, so the higher the profit the higher the bonus or, if a certain level of profit is achieved only then the bonus is payable. Directors and employees have an incentive to use earning management practices in an effort to maximize the bonuses received when such bonus schemes are tied to reported earnings.

Manipulating Share Price:

Creative accounting may help maintain or boost share price, both by reducing apparent levels of borrowing, making the company appear subjected to less risk, and by creating the appearance of a good profit trend. By doing so the company is able to raise capital from new share issues, offer their own shares in takeover bids and, resist takeover by other companies.

Financial Problems:

The business needs additional financing; that is, it requires a loan or aspires one at a favorable rate. Normally, less risk perceived by the lender leads to lower interest rate charged. High reported earnings, high assets, low liabilities and high shareholder equity amounts accompanied by high earnings, convey the impression of improved credit quality as well as, high debt rating to a lender, or bond investor. As a result, creative accounting practices used to improve reported financial measures can lead to lower corporate borrowing costs.

Insider Trading:

If directors engage in ‘insider dealing’ in the shares of company , they can then use earning management to delay the release of information for the market enhancing opportunities to benefit from inside knowledge.

3. Abuses of Earning Management and International Accounting

In most cases where earning management is done, accounting policy choice and application simply fall within the range of flexibility inherent in international accounting standards, and GAAP. Whilst it can be argued that the manner in which the accounting policies is employed are largely a function of management judgment , in most cases this judgment results in the biasing of reported financial results and position in one direction or another. It presses the envelope of what is permitted under IAS and GAAP, although it remains within boundaries, and it is not fraudulent financial reporting.

At some point, a line is crossed and accounting practices being employed move beyond boundaries of IAS and GAAP. Financial statements that result are not considered to provide a fair presentation of a subject company’s financial results and position once the line is crossed, and adjustments become necessary. Here are some common abuses and the particular international accounting standard.

3.1 Revenue Recognition (IAS 18):

Faced with the slow growth, a company may overstate operating revenues by recognizing them too early .For example if item issued to distributers on a ‘’sale or return’’ basis are recorded as sales (even though they may be returned) this will inflate sales and profits.

Since the sales have not yet been paid for, this will also increase the receivable figure in balance sheet. The increased receivable figures (longer debt collection period) is one way that analysts may be able to spot this kind of manipulation. The receivable figure tends to increase over time until the manipulation is discovered. Other examples include holding the books open and continuing to record shipments that clearly belong in subsequent periods and recording sales without the shipment of goods.If reported profit is significantly higher than the operating cash flow for the period, this may be another indicator that profits are being overstated.

Sybase’s shares dropped an additional 20% when the company reported improper practices at the Japanese subsidiary, which Sybase said included booking revenue for purported sales that were accompanied by side letters allowing customers to return software later without penalty.

The accounting standards dealing with this (principally IAS 18) has prescribed the criteria to decide when revenue should be recognized:

In case of goods, that ownership has genuinely been transferred; that the economic benefits and risks of ownership lie with the buyer.
The revenue that seller gains must be measurable.
The costs of supplying the goods or services can be measured.
It is probable that the revenue will be received.
The completion stage of partially completed contract of services can be determined.

According to IAS 18, the notes to the accounts should explain the revenue recognition policy. Although new rules and regulations imposed by IASB and other accounting bodies have improved the situation, revenues remain one of the most easily manipulated numbers in the accounts.

3.2 Unusual Assets ( IAS 16/38 )

Capitalizing expenditure involves posting transactions to the fixed assets in the Balance Sheet rather than the expenditure section in the Profit & Loss or by amortizing capitalized amounts over extended periods. If the true and fair view would be to post it to the expenses then to post it to fixed assets (i.e. to capitalize it) could be classed as earning management .Result of this would be that both the profits and asset values will be inflated.

In the case of WorldCom, a large us telecommunication business, it was alleged that operating profits had been overstated by treating certain operating expenses, such as basic network maintenance, as capital expenditure during 2001 and 2002.To correct this overstatement ,net profit had to be reduced by $ 3.8 billion.

Under IAS 16,costs such as servicing should be treated as an expense and should be recognized in the income statement. Subsequent expenditure should be capitalized only if it results in an enhancement of economic benefit beyond those previously recognized.

A common charge seen at the time of the combination of technology firms is a charge for purchased in-process research and development. As the name suggests, purchased in process R&D is an unfinished R&D effort that is acquired from another firm. It might be an unfinished clinical study on the efficacy of a new drug or an unfinished prototype of a new electronics product.

According to IAS 38, if the acquired R&D has an alternative future use beyond a current research and development project, the expended amount should be capitalized. Capitalization also would be appropriate for purchased in process software development, a form of R&D, if the software project has reached technological feasibility.

3.2 Profit Smoothing ( IAS 37 )

Income smoothing refers more specifically to the preference of reporting steadily rising profits. A form of earnings management designed to remove peaks and valleys from a normal earnings series, including steps to reduce and “store” profits during good years for use during slower years. For example, deliberately not disclosing a contingent liability, or significant going concern problems, in the notes to the financial statements means that the disclosures required (under IAS 37 and IAS 1 respectively) have intentionally not been made.

From the preceding examples, it can be seen readily why earnings management is also known as income or profit smoothing. It is because the practice of earnings management often is designed to produce a smoother earnings stream, one that suggests a lower level of earnings uncertainty and risk.

Earnings at General Electric Co. (GE) have grown steadily for decades. It is tough to expect such a smooth and growing earnings stream. Certainly the diverse nature of the company’s product and service mix provides a diversification effect that yields a more stable earnings stream. Beyond its product and service diversification, however, the company has in the past demonstrated a willingness to take steps that appear to manage its earnings to a smoother series. Analysts, noted that GE is “certainly a relatively aggressive practitioner of earnings management.”

Sometimes in a bad year a company may decide to write-down assets in a wholesale fashion. Earnings expectations have not been met. The implicit view is that there will be no additional penalties for making the year even worse. By writing down assets now, taking a “big bath,” as it is called—the balance sheet can be cleaned up and made particularly conservative. As such, there will be fewer expenses to serve as a drag on earnings in future years.

3.3 Change in accounting Policy (IAS 8):

Another way of earning management is through a firm’s selection of the accounting policies it employs in the preparation of its financial statements or in the manner in which those accounting policies are applied. The companies involved are simply using available flexibility in accounting principles.

It does not mean that the applicable financial reporting framework has not been followed. It may be that the manipulation of published figures is the result of selecting an accounting policy which is allowed under the financial reporting framework, but which does not reflect economic reality. For example, changing the estimated life of a non-current asset is allowed under financial reporting standards, but if it is done purely to manipulate the depreciation charge (and therefore earnings), then it becomes an example of earnings management.

IASB in international accounting standard 8 has prescribed the criteria for selecting and changing accounting policies together with the disclosure and accounting treatment of changes in a reporting entity’s accounting policies, accounting estimates and corrections of errors. An enterprise may voluntarily change the accounting policy only if believes that the change will improve the presentation of the financial statements. An enterprise discloses any change in accounting policy that has a material effect in the current period or is reasonably expected to have a material effect in later periods. It should also disclose, to the extent ascertainable, the amount by which any item in the financial statements is affected by a change that has a material effect in the current period. Where the enterprise is unable to ascertain the amount with reasonable efforts, the fact should be disclosed.

Entities must adopt consistent accounting policies for similar transactions unless an IFRS/IAS requires a more specific policy to be adopted. Entities are only allowed to change an accounting policy if it is required by an IFRS or IAS; or, it results in financial statements providing more reliable and relevant information about the effects of transactions on the entity’s financial position, performance or cash flows.

3.5 Off Balance Sheet Financing (IAS 1):

“Off balance sheet financing” is when debt financing is not shown on the face of the balance sheet. This allows a company to borrow without calculations being affected of measures of indebtedness such as gearing. Motives for this may be to mislead investors and remain within the terms of debt covenants. It may also sometimes be a side effect of the method for raising capital chosen therefore, it is probably best to be suspicious of the motives for raising debt in a manner that is not visible to investors. As standards have caught up with loopholes that allowed off balance sheet financing.

The scope for off balance sheet financing has reduced over the years which in the past have included leasing and borrowing through special purpose vehicles.

Conclusion and Recommendations:

It is a difficult task for the regulators to cope with earning management. They need to update the rules to control earning management on one hand, allow flexibility and promote the culture of voluntary disclosure on the other hand. The danger of over regulation is that companies will assume it is the regulators’ responsibilities to ensure transparency rather than their own. By a mixture of regulations aimed at special abuses and more fundamental accounting and auditing standards that require the application of the spirit of the law rather than merely the letter, regulators have been successful in eradicating many of these practice.

It is to be stated that the impact of creative and fraudulent accounting can be reduced by streamlining the accounting and auditing system and more effective corporate governance. Earning management can be reduced by:

1. Introduction of forensic accounting for white collar fraud detection and fraud prevention;

2. Minimizing the alternative choices of accounting treatment in accounting standards;

3. Enhancing the quality of corporate governance;

4. Amending Companies Act;

5. Enforcing strong regulation, and

6. Increasing the effectiveness of audit.


Free Essays

Differences and similarities between financial and management accounting


In this essay I will be talking about the differences and similarities between financial and management accounting and how they are used to communicate a business’s financial information to shareholders and managers.

In business there are various areas marketing, economics, accounting and finance among these accounting is one of the most difficult ones as it requires you to analyse and report a business’s financial transactions thought periods of time. Accounting divides into various areas but the areas I will mainly be looking at are financial and management accounting.

Financial Accounting

Financial accounting is about with the preparation of financial statements for the use of the stockholders, suppliers, banks, employees, government agencies and the owners of the business enterprise.

It is intended to aid in the reduction of problems that may arise in the day to day transactions of the business. It publishes an annual report that summarizes an organizations financial data that are taken from their records.

It is governed by local and international accounting standards. Its main purpose is to produce financial statements, provide information that can be used in the decision making and planning and to help an organization meet regulatory requirements. It is a legal requirement of all publicly traded organization.

Management Accounting

Management accounting is concerned in providing basis for decision making and use of information by managers within an organization. It helps identify, measure, accumulate, analyze and interpret information to be used in planning, evaluation and control to ensure the proper use of organizations resources.

It also provides financial reports to shareholders, creditors, regulatory agencies and tax agencies. Management accounting involves sales forecasting reports, budget and comparative analysis, feasibility studies and merger or consolidation reports.

It is intended to provide information that is more a forecast than a background, to managers within the organization, is confidential and is computed by using information systems rather than general financial accounting standards. It is used in strategic, performance and risk management.

Management accounting has the following concepts:

. Cost accounting which is a central element is managerial accounting.

(GPK) which a German costing method that gives ways on how to calculate costs that are assigned to a product or service.

. Lean accounting is used for a lean enterprise.

. (RCA) gives managers the information required to support an organizations growth.

. Throughput accounting which recognizes modern production processes need for each other.

. Transfer pricing which is used in manufacturing and banking.

1. Financial accounting is legally required from an organization, while management accounting is not.

2. Financial accounting must be reviewed by a separate accounting firm, while management accounting is not required of this.

3. Financial accounting is concerned about how the financial resources of the organization will affect its performance, while management accounting is concerned in how the reports will affect the behaviour and performance of its employees.

4. Financial accounting is governed by both local and international accounting standards, while management accounting is not.

5. Financial accounting is historical in nature, that is, the reports are based on an organizations previous performance and dealings, while management accounting is a forecast


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Free Essays

How moral intensity and ethical decision making differs between uk business students and accounting professionals?


As a result of major scandals within the business world such as Enron, WorldKom, Kmart and more recently the Bernard Madoff Ponzi scheme, the importance of business ethics has increased, consequently there has been great concern that business professionals do not have correct ethical values. Waddock (2005).It has been suggested by Jones et al (2003) that many scandals could have been prevented if professionals had better ethical decision-making processes and in the case of Enron, could have produced a different audit opinion. Freidman (1970) believed that “The social responsibility of business is to increase its profits” and in some cases unlawful methods have be used to insure this resulting in lengthy jail sentences and expensive lawsuits. If ethical behavior is to be improved it is vital that the components involved in the process of making ethical decisions is understood and according to Jackling et al (2007), education in accounting ethics would help cure the professions ethical collapse. Ahadiat and Mackie (1993) suggested that if accountants and business professionals are to have the ethical standards expected of them in the industry, university business schools and places that offer professional training, must insure graduates are given the correct training to effectively deal with any ethical dilemmas they may come across in the


Ethical decision making models show variables that have an impact on ethical choice and create a foundation for how ethical decisions are made within organisations. Rest (1986) formed a model consisting of four stages that an individual is subjected to when making an ethical decision.The process begins with an individual identifying a ethical dilemma, making an ethical judgment, their intention to act ethically or unethically and finally the ethical action taken as a consequence. Jones (1991) provides the “most comprehensive synthesis model of ethical decision making” Loe et al (2000) pp-186. Jones (1991) combines in his model, previous ethical decision making models, with a particular focus to Rest’s (1986) model of ethical action, using it as a bases to introduce the concept of moral intensity. Many educational programs can be designed using the components of moral intensity, as Leitsch (2006) makes clear, further empirical research using Jones’s (1991) model is imperative as it would increase our knowledge of the ethical decision making process. The purpose of this dissertation is to incorporate Jones’s (1991) theoretical model into the ethical decision making process of UK business students and accounting professionals, using different ethically challenging scenarios. The understanding of the ethical decision making process of business students and accounting professionals will help recruiters identify areas that may need further attention in teaching courses, ensuring graduates are well trained and subsequently thwart the escalation of more headline scandals within the business world.

Background Literature

Early ethical studies were based around normative models that stated what should take place in an ethically challenging situation. Thorne and Ferrell (1993) criticised these early approach’s to business ethics, as they assumed strict rules that had to be adhered to when making ethical decisions in an organisation. Hunt (1991) agreed with the thoughts of Thorne and Ferrell (1993) expressing that positive models provided a guide that helped to improve our understanding of business phenomena hence positive ethical decision making models were fashioned. Hunt and Vitell (1986) produced a model on the general theory of ethics that concentrated on personal, organizational, industrial and cultural factors. The contingency framework of Ferrell and Gresham (1985) focused on individual, cultural and opportunity factors, whilst Trevino (1986) produced a situational-individual model directed on job and organizational factors.

The Jones (1991) moral intensity model, incorporates the factors that effect ethical decision making used in the previous models mentioned above, Loe et al (2000) makes clear that Jones’s (1991) model, represents the overall agreement regarding the variables embodying the ethical decision making process, by including the concept of moral intensity. Both Ford and Richardson (1994) and Loe et al (2000) in their reviews on the empirical literature concerning the ethical decision making process, recommended that there be further testing. In agreement with the reviews, Ming et al (1998) acknowledged that there had been “limited empirical literature pertaining to Jones’s model”, hence further empirical testing of the moral intensity model is desirable. Similarly empirical studies that have looked at education, years of education and differences between students and professionals, were described by both, Ford and Richardson (1994) and Loe et al (2000) to have mixed results and deemed inconclusive. As a result of these non-significant or mixed results and a lack of empirical studies on the Jones’s (1991) model, the variables used in this investigation have been produced.

Processes involved when making an ethical decision

Rest (1986) believed that when making any form of ethical decision an individual goes through four key steps shown bellow. The first step is the identification of an ethical dilemma, Larkin (2000) states that the “ability to identify ethical and unethical behavior is essential in all professions”, he goes on to add that when a person acknowledges the moral aspects of an issue there opinions, choices and goals are influenced.

After noting an ethical dilemma, Rest’s (1986) model moves on to the second stage, ethical judgment. Blasi (1980) states in his critique, “without judgment, an action, no matter how beneficial, would not be moral”. It is for this reason that the second stage to Rest’s (1986) model is vital because without ethical judgment, a decision can’t be deemed right or wrong. Kohlberg (1969) formulated the concept of cognitive moral development (CMD), this is an important factor in Rest’s (1986) model, as much of ethical judgment is determined by an individual’s moral development. According to Wyld et al (1994) “Relating Kohlberg’s model to business decision making and behavior has been central to the building of theoretical frameworks”, particularly Jones’s (1991) model.

Once an ethical judgment has been made the individual then decides whether to act ethically or unethically. This third stage in the model demonstrates the individuals “intention to act, which is determined by the value an individual places on the ethical course of action versus the value of other courses of action”, Sweeney et al (2010).

Research by Laczniak and Inderrieden (1987) and Chonko and Hunt (1985) found that this stage was vital in understanding ethical behavior as it had a profound effect on the ethical action taken by the individual, in the final stage of Rest’s (1986) model. Rest (1986) put forward the question, “why then would one ever chose the moral alternative, especially if it involves sacrificing some personal value or suffering some hardshipWhat motivates the selection of moral values over other values?” (pp. 13-14).Various theories have made an attempt to answer this question. Staub (1989) implied that that majority of moral motives depended on the individual’s personal aspirations. Bandura (1990) theorised two sources of intent, self-sanctions, which are supportive of Staub’s (1989) findings and social-sanctions. Social Sanctions enthused people to base their intention to act ethically or unethically on the approval of others, to prevent censure within the organisation. These theories suggest that moral intentions are influenced by personal aspirations and social-sanctions from others. It can be seen that in answer to Rest’s question people use moral alternatives because the choice shows who they are and how others view them.

The final stage in Rest’s model is performing the ethical action; there has been little research into this due to problems measuring and observing behavior, Jones et al (2003). Critics of Rest’s (1986) model such as White (1999), found that in some extreme situations individuals may act immorally even if they are capable of moral reasoning. As a result of these skeptics, Jones (1991) introduced his own independent variable of moral intensity, which he found influenced the ethical decision making process initiated by Rest’s (1986) four stage model of ethical action.

Moral Intensity

Moral intensity relates to the issue itself and to every unique situation Shaub (1997). Consequently Jones (1991, p372) described moral intensity as being “a construct that captures the extent of issue-related moral imperative in a situation”. Ethical dilemmas tend to be evaluated within the context of the situation; hence an evaluation of the situation is imperative in understanding if a situation is ethical or not Dewe (1997). The conception behind moral intensity has often been related to the criminal justice system; in that your punishment is proportionate to the severity of the offence you commit Davis et al (1988). According to Jones (1991) moral intensity is a multidimensional construct and he identifies six characteristics that make up the moral intensity model.

Magnitude of consequences is defined by Jones (1991, p374) to be “The sum of the harms (or benefits) done to the victims (or beneficiaries) of the moral act in question”. The idea is brought about from the basic mechanics of human nature; some moral issues have much harsher consequences and in turn, are more morally intense than an action with less serious consequences Barnett and Valentine (2004).

Social consensus is labeled by Jones (1991, p375) to be “the degree of social agreement that a proposed act is evil (or good)”. It does however bring up the question of whether a person knows what is deemed good ethics or bad ethics in a situation. A strong level of social consensus against behavior that was unethical would help an individual understand when a behavior was wrong or right. Empirical testing by Laczniak and Inderrieden (1987) found that illegal decisions were rejected on more occasions than unethical decisions, implying that people had a strong social consensus against illegal decisions, as the impact to them would be much greater than unethical decisions. Laczniak and Inderrieden (1987) concluded that for a subject to respond appropriately in a situation they needed to have a consensus of what originally was the right course of action to take.Previous studies that have concluded social consensus to be the key dimension have used student samples, where as studies finding magnitude of consequences to be the key dimension used managers and professionals Barnett and Valentine (2004).

The probability effect is defined to be a “Joint function of the probability that the act in question will actually take place and the act in question will actually cause the harm (benefit) predicted” Jones (1991, p 375). The lower the probability the lower the moral intensity. Research by Singer et al (1988) has found that the probability dimension is a significant factor of whistle blowing. Studies by Kahneman et al (1982) found that individuals were not good estimators of probabilities.

Temporal Immediacy was explained by Jones (1991, p376) to be “the length of time between the present and onset of consequences of the moral act”. The shorter the length of time the greater the immediacy of the act in question. Jeanette et al (2009) states that Jones (1991) has included the construct of temporal immediacy for two reasons. The first being that people tend to disregard the impact of events that happen in the future and that people are generally more worried about events that effect the short term, than those that effect the long term.The second is that large differences in time, increases the probability that the act in question will cause harm or benefit, reduces.

According to Jones (1991, p 377) “The concentration effect considers the inverse function of the number of people affected by an act of given magnitude.” In other words it corresponds to the amount of people affected by a given act.

When there is a low concentration of effect it can be assumed that in the case of accounting professionals, a greater number of people will be affected by earnings management decisions. This would result in accountants being more likely partake in acts that involve earnings management. Studies by Carlson et al (2002) and Chia and Mee (2000) found that the concentration of effect had no effect on the ethical decision making process, however as there is limited information surrounding the implications of the concentration effect on moral intensity it will be included in this study.

The last component of the moral intensity model is known as the proximity factor. Jones (1991 p376) defines this as “the feeling of nearness (social, cultural, psychological or physical) that the moral agent has for victims (beneficiaries) of the evil (beneficial) act in question”. It is natural for people to be more concerned about those who are close to them; a simple example is comparing an individual’s relationship with their family to that of a stranger. Frey (2000) therefore identifies that with higher levels of proximity moral intensity increases.

Concordant with Jones (1991) all six components of the moral intensity model represent the characteristics of a moral issue and are interlinked with each other. In general his theory insinuates that as any component of the model increases so too does the overall level of moral intensity.

Hypotheses and Research Methods

Identification of an Ethical Dilemma

All four stages in Rest’s (1986) model of Ethical Action will not be investigated in this paper as previous studies by Hunt and Vitell (1986) and Trevino (1986), found that measuring actual behavior was extremely difficult. Jones (1991) suggested that issues with high moral intensity well be identified by individuals as being a moral issue much more frequently than issues of low moral intensity. Marshall and Dewe (1997) found that ethical dilemmas that are more salient will appear less casual and therefore be more likely to lead to an ethical predicament. Studies that have found an association between moral intensity and the identification of an ethical dilemma have been mixed. Singhapakdi et al (1996) identified that moral intensity and the identification of an ethical dilemma were strongly related in all of the scenarios used. In contrast, Marshall and Dewe (1997), Chia and Mee (2000) and May and Pauli (2002) found that a positive correlation between moral intensity and the identification of an ethical dilemma was not always related to all of the components of Jones’s (1991) model. Research by Marshall and Dewe (1997) and Chia and Mee (2000) found that out of the six characteristics forming the model, only social consensus and magnitude of consequences were found to relate to the identification of a moral issue. In the case of May and Pauli (2002) moral intensity was strongly related to the identification of an ethical dilemma but in only one of the two scenarios they used. It is clear from the lack of consistency in results from the various studies conducted further testing is needed.

H1 From previous findings it can be hypothesised that as moral intensity increases so too will the identification of an ethical dilemma.

Ethical Judgment

The relationship between ethical Judgment and moral intensity has been researched extensively and is the component of Rest’s (1986) model that has received the most amount of attention empirically. In general most studies such as those by Barnett (2001), Harrington (1997), Morris and Mc Donald (1995) and Singer and Singer (1997) have found supportive evidence that there is a strong relationship between magnitude of consequence and social consensus in regard to ethical judgments. The above studies have found that in most cases if an act is deemed to have very severe negative consequences for example imprisonment, they are in most instances considered more unethical than acts believed to have less serious consequences. Singhapakdi et al (1996) found that not only the magnitude of an action’s consequences and social consensus to be positively related to ethical judgements but also temporal immediacy and the probability of harm to be notably related to ethical judgement. Jones (1991) found decisions that are identified to have high moral intensity (more unethical), require and individual to take more time gathering facts, information and key values surrounding the issue. Situations that are less unethical would not require so much attention. For this reason it can be suggested that,

H2 As moral intensity increases so too will the level of ethical judgement.

Ethical Intentions

When making an ethical decision, Hunt and Vitell (1986) found that an individual’s intention to act ethically is based on the probability that he or she will engage in a particular action. The ethical decision making models of Dubinsky and Loken (1989) and Hunt and Vitell (1986) as with the models of Rest (1986) and

Jones (1991), incorporate the formation of intentions as a component to the ethical decision making process. Jones (1991, p387) proposed that “moral intent will be established more frequently where issues of high moral intensity are involved than where issues of low moral intensity are involved” and studies by Harrington (1997) identified significant associations between ethical intentions and magnitude of consequences.It was also noted that when proximity and social consensus was high individuals may try and avoid situations of negative responsibility by forming behavioral intentions that we more ethical Fisk and Taylor (1991).

H3 Ethical intentions and moral intensity will be positively linked

The effect of moral Intensity being issue related

It is known that the components of moral intensity and the effect they have on the ethical decision-making process are influenced by the type of situation. Sweeney and Costello (2009). Wright et al (1998) established that the recognition of an issues moral characteristic along with the moral intensity of an issue was greatly influenced by the type of situation. Silver and Valentine (2001) found that undergraduate students understood the moral intensity of the situations presented to them and acknowledged differences between the different scenarios. Leitsch (2004) also found that the type of situation influenced the students in the studies awareness of the moral intensity components, as well as their moral judgment. From Leitsch’s (2004) study, it was concluded that accounting students judgments towards the ethical nature of issues, as well as their perceptions of moral intensity varied depending on how unethical an issue was deemed to be. Other researchers such as Barnett and Brown (1994) established differences in ethical judgments depending on the situation an individual found themselves in, where once again differences were recognised to be between less unethical and more unethical issues. From these findings it the following hypothesis could be established.

H4 The nature of the situation presented to accounting professionals and business students, will influence how important they perceive the moral intensity components and the ethical decision making process to be.

Demographic Variables

Flory et al (1992) found that demographics had no relationship to ethical decision making although others disagreed with this. According to Ford and Richardson (1994) gender was investigated in more empirical studies than any other single variable. The majority of studies such as those conducted by Vitell and Singhapakdi (1990), Callan (1992) and Serwinek (1992) found that there was no relationship between gender and ethical decision making. Other studies by Chonko and Hunt (1985) and Ferrell and Skinner (1988) found that females were more ethically sensitive than males. Loe et al (2000) articulates that although gender is the most highly researched area of business ethics, research in the area still remains inconclusive. Further developments on methodology are needed when conducting ethical research in this field hence, as part of this study gender will be observed.

Prior research by Lysonski and Gaidis (1991) found that students were good assistants to managers as particularly those in their final year of study, were able to think and make ethical decisions similar to that of their more experienced counterparts. Lysonski and Gaidis (1991) concluded that students had similar ethical sensitivities to managers as there were no significant differences in their reactions to ethical dilemmas. Contrasting to the views of Lysonki and Gaidi (1991), Borkowski and Urgras (1988) observed that there was no connection between the ethical attitudes of major and non major business students. Silver and Valentine (2000) found that the moral intensity component of social consensus was substantially different between major and non-major business students. Examinations by Kidwell et al (1987) recognised that those with more years of employment exhibited responses that were more ethical than those with less years of employment. In addition to these studies, Arlow and Ulrich (1980) along with Stevens (1984) found that professionals were more ethical than students. By analysing the various research studies around the education and employment backgrounds of individuals, Loe et al (2000) identified that research investigating the differences between the ethical decision making processes of professionals and students produced mixed results. He produced similar conclusions to that of Ford and Richardson (1994), realising that a clear understanding of the relationship between professional experience and level of education required further analysis. In this study the impact being an undgraduate business student or accounting professional on moral intensity and the ethical decision-making process will be scrutinised in this study.

Other demographic variables that have been investigated include personality, beliefs and values, organisational effects and Industry type. Once again these are areas requiring further empirical testing as evidence has proved to be inconclusive, however the components of ethical decision making used in this study are not suitable to include these factors.

Research Method

Quantitative analysis was deemed to be the best way to evaluate the hypotheses brought forward in the study. Questionnaires allow large quantities of information to be collected quickly and economically Brennan (1998)Sweeney and are a good source to quantify data from. As previous studies examining the ethical decision making process used quantitative analysis it was beneficial to repeat the process as it allowed for better comparability of results.

Questionnaires were self administered to business students within the University of Hull and given to two university students from two other institutions within the UK (Queen Mary University of London and Leicester University) who handed out and collected questionnaires from fellow business students within their departments. Another selection of questionnaires were emailed to the HR departments of various accounting firms within the UK and personally given to one accountant working at a commercial firm to hand out to accounting professionals within two of their offices. The sample used therefore consisted of undergraduate business school students from three UK universities and professional accountants.

Those administered questionnaires were assured that participation was entirely voluntary and both students and professionals were promised that results would be kept confidential. It was also reiterated that it was not necessary to put any form of identification on the questionnaire, just an acknowledgement of what course you were studying for university students. Accounting professionals were given a slightly different questionnaire that did not include the option previously mentioned for administrative purposes when collecting results.

Research Instrument

Scenarios, vignettes and questionnaires were used by Singer et al (1998) and Cohen et al (2001) to recreate ethical situations individuals may find themselves in at work. The majority of studies on the ethical decision making process used these methods and they have thus far been proved the most effective way of testing the ethical decision making process. The scenarios used in this study have been adapted from those previously used by Leitsch (2006), Flory and Phillips (1992) and of Dabholka and Kelarris (1992) where each scenario recreated a business dilemma that may occur in the workplace. The first scenario-based questionnaire administered to students included a scenario that the majority of business students from a non-accounting background and even some who were from an accounting background could not understand. This resulted in many students simply guessing an outcome they thought appropriate or many simply left the question blank, due to the issue needing an in-depth knowledge of business that many hadn’t acquired yet. To rectify this, scenarios were altered to represent business issues of which both business students and accounting professionals could fully understand.

Scenario one is developed from Dabholka and Kelarris (1992), in their ethical scenario a sales person booked tickets with a particular air line because they were given promotional vouchers which they could use for their own personal use. The individual did this this knowing that ticket prices for that airline were higher than its competitors. Respondents were required to evaluate the situation and asked whether the actions posed an ethical dilemma. Flory et al (1992) produced a scenario that addressed similar ethical issues found by Dabholka and Kelarris (1992) however they incorporated an accounting focus to the issues presented. Flory’s et al (1992) study included scenario’s based on videotape footage produced by the Institute of Management Accountants. The video included five ethically challenging situations that the authors believed could be encountered within the workplace. Flory et al (1992) formed scenarios that were roughly 200 words in length and attempts were made to ensure the ethical complexities from the videotape were transferred to the written forms.

At the end of each scenario was an action taken in response to the ethical dilemma ensuring that all respondents were acting in response to the same stimulus.


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Free Essays

Outline the principle strengths and weaknesses of accounting and business research.


This project/essay is broadly based on a research article “The management of accounting number: case study evidence from the ‘crash’ of an airline” by Ann Jorissen and David Otiey (2009 publishing date) and “Earnings quality in ex-post failed firmsby Juan Manuel Garcia Lara, Beatriz Garcia Osma and Evi Neophytou (December 2008 publishing date). Main body is mostly concentrated on the research methods used and the strengths and weaknesses of the two approaches and the methodologies used by the researchers in these empirical papers.


The empirical papers which I have chosen for “accounting and business research” have done research on an “airline company” {Case I} and “bankrupt firms” {Case II} and they have conducted several interview, used multi-theory method (upper-echelons, power-circulation & strategic choice) and sampling method & many models to justify there research respectively.

Research method:

Case I company:

The researchers had selected SA irgroup (former Swiss Air) as there case company to study process and mechanism triggering to manipulation of accounting numbers.

Case I data:

Interview of different ex-employees was conducted and different categories of archival data were used by researchers like:

i. Bonus and stock option plan SA ir-Executives – 1997-2000;
ii. Bonus and stock option plan Sabena – Executives – 1999-2000: etc was used.
Case II company:

The researchers selected a junk of companies of UK by sampling method which had gone bankrupt and had data available in FAME entering bankruptcy 1998-2204 or continuing firms which had full data available in FAME 1995-2004.

Case II data:

The data used by researchers was taken from the FAME.

Method used:

Case I

They analyzed data in two phases wherein embedded design was employed which implied multiple levels of analysis (Eisenhardt, 1989). They had adopted interview method for there research but also included archival data. There research was based on both accounting as well as management perspective.

First phase:

In the first stage they arranged data in chronological order and reviewed all internal and external data available. Herein they analyzed data in directionality of the relationships assumed in traditional accounting research. They used a multiple case approach by considering each investment of the SA irgroup in a foreign airline. Each case they analyzed served to confirm inferences drawn from the analysis of the choices made in relation to the SA irgroup’s first investment in Sabena (Yin, 2003). The collection of data on all accounting and real choices with regard to all events and transactions would involve an immense amount of data so they used “disaggregated approach”.

Second phase:

The analysis in second phase is based on theories like upper-echelons, strategic choice and power circulation. Then by combining results of the both phases they could explain more about the directionality between the different variables, one employed in financial misrepresentation and the other employed to create the necessary discretion to engage in managing accounting numbers.

Case II

In the first stage they collected all data they needed for the research via sampling method and then they used “working capital version” model of Jones (1991). They used this model first because research had indicated that management had more discretion over current accruals & and moreover manipulation of long-term accruals such as depreciation was unlikely due to their high visibility & low flexibility (Becker et al 1998; Young, 1999). After working capital version model they used “modified jones model” which works on the assumption that revenues are not discretionary i.e. the model disregards that managers also engage in real activities manipulation.

The next model which they have used was “Kasznik model” (1999). The model incorporates the change in operating cash flow as an explanatory variable to account for the negative correlation between accruals and cash flows. The formula to obtain a measure of abnormal working capital according to Kasznik model is as under:

Where, WCA is working capital accruals, ?REV is change in sales, ?CFO is change in cash flow from operations and TA are total assets, and t is the time period indicator. Next, for each firm, we calculate abnormal working capital accruals (AWCA) as follows:

Where, a0,a1 anda2 are the fitted industry-coefficients from equation.

After Kasznik model they used Chariton (2004) model to calculate the ex-ante one-year-ahead probability of bankruptcy of all failed firms. The formula what they used to calculate it is as under:

Where, Pjt (Y = 1) is the probability of failure for entity j at the end of year t.

The next model they used was of Roychowdhury (2006) & Ball and Shiva kumar (2005). The earlier model was used to analyze the existence of real activities manipulation. Herein was focus was on sales manipulation. The later model was used to measure the different recognition speed of economics gains and losses in earnings by using time series & accruals based measures of conditional conservatism.

Case I Case II
i.Inclusion of both perspective i.e. accounting & management (multiple methods) helped them for understanding the process of financial misrepresentation while as previous studies used accounting perspective only which couldn’t give much clarifications of the process.
ii.This multi-theory perspective allowed them to discover various additional elements of discretion on top of the variables used in the extant literature.
iii.According to me face-to-face interviews as conducted by the researchers is that the answer of the interviewee is more spontaneous, without any extended reflection and manipulation.
iv.This disaggregated approach has the potential advantage of yielding precise, directional predictions based on the researches’ understanding and

Analysis of how decision- makers trade off the incentives associated with the accounting object of the study (Francis, 2001).

v.The biggest advantage what these researchers had was having access to group’s internal information which helped a lot in carrying out there researches and justifying there conclusions.

a) Jones working capital & modified model could analyze a proxy for manipulation capturing only pure accounting manipulation & a proxy that pools together accounting and real activities manipulation.b)By using UK sample they were advantageous as the insolvency code are allowed for a wider definition of bankruptcy, with different implications, than in the US (Franks et al 1996; Bradbury, 2007).

c) The best part of sampling method is that it is straightforward and probably the simplest method and is usually unbiased.

d)There access to FAME database and deriving data regarding bankrupt companies made an ease in making assessment of these and setting up there research.

e) Since the researchers have selected or used purposive sampling wherein probability of getting astray is minimum and variance is low in this case of sampling.

Case I Case II
Interview is a complex and demanding technique (Frey & Oishi 1995:02 )
“An unusual degree of trust is likely to lead to willingness on the part of the subjects to answer the questions carefully and with validity. This is especially advantageous when the questions are of a sensitive nature” (Lull 1990:53).
Personal bias may b involved in interview method or understanding factor may become hindrance.
According to me data taken by the researchers was too big in size so accuracy of the result was at stake.
Sampling method can lead to the consequences of redundancy and thus hampering the accuracy of the result.
Using data from data base is complex method and time consuming.

Impact of methodology on my dissertation:

The methods used by the researchers to conduct there research i.e. “sampling” and “interview” and then applying different models and methodologies to derive the results or elaborate there research gave a perfect insight as to how a research should be conducted and then concluded. But I would like to go for “interview”, “available public information” and “questionnaire” method for my dissertation in coming months which would be on “Development in Banking sector in Kashmir” most probably. According to me interview method of collecting information is one of the best as the interviewee has very less time to respond and cannot manipulate answers so quickly in his brain and moreover interview method can help in extracting much internal information if the interviewer has those tactics and attitude of extracting as much information as possible. The questionnaire method gives an insight regarding what people or what the subject think about the given topic or question, it is one of the easiest methods and helps in figuring out the situation or the subject opinion from there point of view and this method would be the most important for my dissertation. Excess to public information and internal information will give positiveness to the dissertation because sometimes these information’s contain very important elements which throw light on various aspects which one researcher is looking for. I would try to rectify all disadvantages of the methods and apply then on my dissertation.

“Basic statistics for business and economics” by Paul G Hoel and Raymond J. jessen
Ball, R. and Shivakumar L. (2005). ‘Earnings quality in UK private firms: comparative loss recognition timeliness’. Journal of Accounting and Economics, 39(1):83–128.
“Elementary business statistics: the modern approach” by Freud and Williams
“Earnings quality in ex-post failed firmsby Juan Manuel Garcia Lara, Beatriz Garcia Osma and Evi Neophytou (2008)

Frey & Oishi (1995:02) “ how to conduct interviews by telephone & in person”

Jones, J. J. (1991). ‘Earnings management during import relief investigations’. Journal of Accounting Research, 29(2): 193–228.
Lull, James (1990) “ Inside family viewing”; London Routledge
Roychowdhury, S. (2006). “Management of earnings through the manipulation of real activities that affect cash flow from operations” Journal of Accounting and Economics, 42(3): 335–370.
The management of accounting number: case study evidence from the ‘crash’ of an airline by Ann Jorissen and David Otiey (2009)

Free Essays

Define the main accounting principles and explain how they affect the running of a business?


In this essay I am going to discuss and explain about the main accounting principles and also explain how they affect the running of the business. Accounting is generally concerned with calculating the profit and loss in a business and how the business is performing financially. In order to do this an accountant must collect analyzing and communicating financial information. The information is then used by the owners of the business and they see where action and decisions need to be made fast and also work out how much they are making and what they are losing and who owes them money and were debt needs to be paid. Accounting is also necessary for stakeholders to make decisions regarding the business and changes to the business as a whole if necessary.

In any case it is vital for the accounting information to be relevant in terms of what is appropriate when the information is analysed. The business should easily be able to access the information relevant to them to weigh up the upsides and downsides of the financial side of the business. One of the most important reasons the business would need the appropriate information to hand is to analyse what is cost effective and what exactly the business is carrying as a liability. The stakeholders then can use this information to make the changes.

In businesses accounting is a necessity, because it is the process of managing, calculating and recording ones financial records. The management of a business’s financial record can involve the recording of various different transactions such as; expenses or revenues, this then helps individuals who manage financial system of the business to determine how much one owes or is owed, without basic accounting a business would not be able to function properly. (Financial-Dictionary)

In order to manage a business effectively account are considered as the main base for a successful business any errors could lead the business to a loss and put them in financial state it also states how much profit and loss the business is making a year which also help process the forms that we need to comply tax return forms to ‘Her Majesty Revenues Custom and Revenue and customs’ which is essential in every business .Account give a brief outline of the business financial dealing side but must be very accurate so they can compared every year to see what is occurring and any improvements that need to be made.( TheTimes100

The first accounting principle That I am going define is the Going Concern principle The term ‘Concern’ is based from the early 20th century which means that is a ‘business’ or a ‘enterprise’ Accountant’s believe a company cannot go bankrupt or broke, unless there is reliable evidence backing the assumption. The concept does not guarantee that a business will be making money and remain in the future time coming. This assumption affects the value of assets of the company and also help accountants to make financial statements in action of assuming and in order to know that the business will not go bankrupt or liquidated which means that whether certain liabilities of a company and find out for certain if assets and apportioning assets and converting them in to cash to pay of the depts. So based on the financial details and evaluation an accountant has on a business which helps predict that the business shall stay for the foreseeable future coming.

The concept also supports the assets of a business that it will remain for a period time for example machinery, land, equipment so that all the assets can be utilized which basically means that securing and getting complete benefit from what the business in earning but if the business is not doing as well as it should be doing then all the assets would be sold within a year paying of the creditors and bankers would be paid out and whatever money is remaining would be given to the owners of the businesses which would put the business where it started off they would have no debt to pay but would not really own anything .

Overall the concept predicts that the business will maintain to commerce for the time coming and give accountants the taste of what the value of the business assets are going to be like whether it is going to make profit or loss and also for the future accounting period predict whether revenue or costs .But however without this concept the accountants would have to write of all their assets in the current period and in the long-term period that still have profitability benefit in the future.

The other principle Separate entity principle this concept involves where the job of the accountant involves keeping all of the business transactions of a sole proprietorship separate from the business owner’s personal transactions. The reason behind this is because for the purpose of the accounting it is considered to be two different entities however for legal purposes they are considered to be as one.

The effect that this has on the business is that the personal expenditure of the owner is kept separate from any costs incurred by the business meaning the owner’s transactions will not show under the business statements. If this principal isn’t followed then this may result in tax implications on the business as the accounts will not show a true reflection on the two different sets of transactions.

Also the consistency Concept which basically involves that when accountants are using one method on a business they should use it the same for any events or transaction in a business. This method is very valuable for a business in order for it compare it results and when the accounts are l0ooked at they can compare accounts from previous years to see whether any profit or loss has happened example is depreciation, once a method has been chosen it should be used every year . (happy accountant)

Prudence principle

This concept is also known as the ‘Conservatism’ this involves accountants to calculate roughly in arranging periodic accounts which are used mostly by small business that have less inventories .If in business the stock that is sold has become damaged it shall be sold and recorded for a lesser value and not it original value and also be more precise about the value of assets and about the profit in a business and not to overestimate them. .This concept entitles you to be very accurate about your assets and profits in a business. The concepts affect the running of the business by clearing uncertainties that surround many transactions by taking a conservative approach to recording such transactions. Accounting principles

For example if you have a business you need to calculate all yeah business and yeah over head straight away .However one of the disadvantages of this concept is that it should not be used for overestimate potential losses which could mislead to business accounts.

Verification principle

This concept involves that all statements in business account must be effective and efficient and verified by and independent person so that all the total of the revenues and expenditures in a business must be the same figures as in the books, ledgers of the business.

The matching and accrual principles are closely linked. Accrual is a form of accounting while matching is a principle which almost goes hand in hand with accrual accounting. The matching principle means that a transaction will only be recognised wen income and expenditures are actually incurred and not on the timing of the cash flow. In simpler words it requires revenues to be matched with expenses. The accrual principle means that income received should be recognized in the same period as the relevant expenditure incurred in earning it. Cash may actually not even be received in that period but it will still be recorded.

Any company or firm that is trading publically is required use the accrual accounting. However it is generally seen as good practice so many businesses use it anyway even though they are not legally required to do so. This helped the creditors and investors in getting a clearer picture of the business’ account.

One of the main benefits of accrual accounting is that during a certain period it creates a more accurate picture of income earned. This is essential for management when they want to make operating decisions. Another benefit is that it helps with cost control as expenses are reviewed more or less as they are earned. Because the account is reviewed on a more regular basis managers can be held more accountable for managing the accounts.

Another principle is the historical cost convention this principle means that the value of items or assets on a balance sheet or financial statements will be recorded as a historical value and not it current value. In the term the historical cost is actually the cost that the buyer paid for the item or the asset in the first place. The cost is usually associated with the purchase invoice. However there is an exception to this principle which is the recording of ‘marketable securities’ which will be shown on the balance sheet on the financial statements in their current value. This principle leads to a state where after several years the historical cost of an asset or an item will bear very little resemblance to the market value.

And lastly the Materiality principle this principle basically means that although all important and relevant information is made available to all parties in questions, any information that is irrelevant or insignificant need not be shown or documented for the view of the parties in question. The reason for this is that the information that is irrelevant or insignificant does not influence the decisions of the parties in question. For example there will be information about the business that need not be communicated to an investor as it will have no bearing or influence on the decision that the investor may take. A term that is used is material facts. Facts that as less significant are not regarded as material facts. To grade the information as material and not material is fully dependant on the party who the information is for. For example a debtor would need see invoices raised and amount outstanding during a period and this information would be considered material. Also the level of detail can also be considered material or not material. It just depends on what level of details the party in question needs to see. And details that are insignificant can be left out as it is not material.

In conclusion I think that Accounting principles are vital for business in order to see what is happening outside and inside of a business

Accounting principles?[onli

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FRANK WOOD & ALAN SANGSTER (2002). BUSSINESS ACCOUNTING 2. : Financial Times /Prentice Hall. P143 -P149.


legalzoom. General accepted accounting principles Stephanie Paul 2008[Online]. Available from:

TheTimes100. Accounting Principles[Online]. Available from:–accounting-principles–112.php

Financial-Dictionary. What is accounting ?[Online]. Available from:

happyaccountant.The Cnsistency Concept [Online]. Available from:] for periodic table words

Free Essays

Social and environmental accounting case study of AVIVA and CSR


Corporate Social Report (CSR) is one of the ways to check how well developed accounting is in the company. Oliver Dubigeon in its article discerns two kinds of companies: the one who begin to account for their social, corporate and environmental responsibility to improve the impression of their reputation and acceptability to civil society and the second who understands that it is a response at this very moment to the ‘right to knowledge and participation’ that civil society is demanding, if not to eliminate the risks to their daily life and to future generations, then at least to control and master them.

First and second parts of this report will be analyzing an insurance company AVIVA, who like one of international community member, has its corporate responsibility. So it is necessary to find out whether this company belongs to the first or second category of discerned companies. Moreover, it is important to look how accountability is pursued in AVIVA company and how it takes responsibility in solving global warming problem. The second part of the report also considers the impact of professional accountancy bodies in global warming, how they deal with global warming issue in reporting. The third part will evaluate the role of global Socially Responsible Investment on the development of accountability. This section will not be specifically concerned with AVIVA company, but it will be considering about the increase of accountability and social and environmental accounting and of course the behaviour for companies.

Part 1 – accountability

Accountability is a concept that relates to flows of information, where those controlling resources provide accounts to society of their use of those resources. So, corporate accountability can be defined as the systematic and public communication of information that is designed to justify an organization’s decisions and actions to various stakeholders.The other definition of accountability made Gray, Owen and Adamsshows that there are two duties: responsibility to take actions and responsibility to account for those actions.

The best feature of accountability is that it can show the external verification of the company’s performance – how well they minimize the social impact of a company’s activity, provide good working conditions for employees and contractors, and create an acceptable arrangement for the distribution of benefits and services. It also can show that company does not carry out with its duties properly. Social Reporting(CSR) is one of the biggest challenges for company on CSR and lack of understanding how properly to do this can be the main problem in bad reporting. Sometimes the content of a report do not reflect actual performance, or it may be incomplete. The problem is that many organisations do not really understand the meaning and purpose of CSR. It is a mistake to think that it is simply engaging in philanthropic activities or making donations. It involves much more than this. Companies do the reporting because of very different reasons. Ones wants to reveal all the information about company’s acts to society, other want to create a “positive” look about the company, and the thirds just do not really know why they do this, but just tries to follow the “model” companies’ example.

Annual report and the financial statements are as a mechanism for discharging accountability. It also includes financial and non-financial information to improve transparency and understandable information enabling users to assess a firm’s performance. AVIVA is an insurance company in which CRS involves a strong organisational commitment to social obligations and the internalization of these obligations in the culture of the organization as well as the mobilization of employees to execute these obligations in their day-to-day actions. But is it all like it soundsAVIVA looks like a big company which seeks to be the leading one in insurance industry, but there can be very contradictory reasons for doing this: the ones which company wants to tell in public and the others which it wants to keep inside the company.

The reasons AVIVA company is so active and responsible in such reporting is because it feels responsible for being an example of correct behaviour for all other beings, this company cares about planet and people. These non – financial reasons shows about companies universal responsibility. There are and financial reasons, which are promoted in CSR, such as reducing risks and increasing profits, because of an improved reputation in various markets.This company reacts to its customers, colleagues and everyone where they operate and takes positive actions towards climate change that shows good level in listening and dialogue with the society around it.

Although, AVIVA makes an impact to accountability, they improve their skills and experience every year and this can be easily seen in their reports. Company was one of the first companies who helped developing and started using the HRH Prince of Wales’ Accounting for Sustainability (A4S) connected reporting framework for their performance report.Using this framework AVIVA reported about greenhouse gas emissions, waste, resource usage, customer advocacy and investing in communities. AVIVA is a very good example for other organisations who wish to connect sustainability performance with business strategy. This company has a very valuable case study, which explains how following Connected Reporting Framework reaches good sustainability reporting practice. AVIVA also put their CR Report to a separate shareholder vote at the 2010 AGM and they are the first company in UK by doing this.

All this proves about Aviva’s active and valuable contribution to CSR, because even being a right example for other companies it already helps for better and clearer understanding in CSR area which is still found difficult for organisations to understand and make valuable reporting.

Part 2 – accounting for global warming

Today’s actions will affect future generations, and nowhere is this more evident than in our approach to climate change and the environment. Global warmin is long lasting problem in the world. There are a lot of different opinions about this, but it is clear that some part of the world is trying to do something on behalf of the environment. The insurance industry has the most to lose from the increasingly extreme weather that scientists agree is the result of global warming. Aviva’s strategy is to control their own impacts and resources, including water, gas, waste and electricity. The main impact on the environment is Aviva’s total carbon dioxide emissions. There is a small number of companies, who are carbon neutral, but AVIVA was the first insurer to offset emissions on a global basis and become carbon – neutral, this company is a good example for all other companies, who used more to talk than to act. AVIVA is a signatory and responding company to the Carbon Disclosure Project (CDP), moreover, in 2009 it was ranked eighth in the Carbon Disclosure Leadership Index for the FTSE350, third in the financial services sector and 38th overall in the FSTE Global 500.

The results of emission reducing is best seen now, when in 2008 company reduced 6,6% of CO2 emissions and further 5,2% in 2009. Companies aim is to reduce their carbon emissions by 30% till 2020, from their 2006 baseline, which is 120000 tones of CO2. Company also encourages others to do the same, to manage and reduce the CO2 output, because CO2 is the principal ‘greenhouse’ gas contributing to global warming.

AVIVA has invested in cutting-edge tropical storm research, revamped its flood models to incorporate global warming, publicized the need for action and encouraged reduced vehicle usage with pay-as-you-drive insurance.

During the period of 2005 – 2010 AVIVA company continuously improved and reported of their direct and indirect environmental impacts. In all these years AVIVA company is trying to develop products and services that provide a positive link between climate change and premium paid. In 2005 AVIVA established a climate change forum to coordinate related activities across their businesses. In the same year, company involved in including flood research, flood mitigation and prevention work, sponsored a pan-European flood project. 2008 was the year, when AVIVA concentrated on water: they helped people to prepare to deal with a flood and shared the information how to limit the damage. Company is encouraging others to make responsible choices and tries to promote good environmental practice among their colleagues, customers and suppliers. In fact, Norwich Union is playing a leading role helping to mitigate the effects of global warming. The other offer made, seeking to provide right decisions for environment was in 2006, by offering reduced premium insurance for drivers of hybrid and flexi – fuel Ford cars.

2007 was the year of projects. During this time, AVIVA made a progress on three strategic areas to combat climate change: carbon reduction, carbon offsetting and enhanced employee education and engagement. Biogasproject, wind turbineproject, “Green cement”project, treadle plumps and other projects where AVIVA company participates, shows that this company is very active in environments protection, it belongs to various organizations, sponsors projects and also takes valuable actions inside the company, such as signing a ‘green’ service level agreement with Hewlett Packard (HP) in 2009, for the provision and running of two data centers which are ran by ‘eco friendly’ or renewable power sources.

AVIVA is an independent auditor, which uses the guidance of rules made of International Federation of Accountants’ (IFAC). This organisation made a contribution to global warming by considering this problem from a strategic perspective: it explored the enterprise governance model which encourages organisations to view governance as having a performance as well as conformance perspective. The aim of this model was to consider why corporate governance often fails in companies and, more importantly, what must be done to ensure that things go right.

It still seems like the professional accountancy bodies are not involved in global warming problems as they could be.This proposition is wrong, because a professional accountancy body keeps an eye to global economy. Issue of sustainability is not an exemption too. In the company accountants might also become involved in the development of environmental and social accounting, by doing this, accountants would be involved in the organization’s management of environmental performance at all points of the company.Environmental accounting, accurate global warming, shows the interaction between the world and the company.

Part 3 – socially responsible investment

UK Investment Forum, describes socially responsible investment (SRI) as ‘‘investments enabling investors to combine financial objectives with their social values’’.Miller A. SRI equates to Ethical investments and explains them as the contribution towards particular social and environmental aims. So, socially responsible investment seeks for two benefits: social good and financial return. The problem arises when this investment becomes more money making than improving social, ethical values, becoming eco – friendly company. Of course, it can not be said about all organisations that they look just for profit for themselves, in many companies it is more a positive issue – they help environment, takes care of it and also helps other companies as being a right example. That shows that positive and negative criteria’s can be made analyzing SRI market.

In recent years, SRI has experienced an explosive growth around the world. The growing increase in global SRI determines the better and wider understanding about companies ethical values in environment. Without good environmental management company would not achieve the maximum of profitable green investing. It is understandable why companies want financial profits of all investments, but it is important to seek more for the positive aspects of the green investments. So, there are negative and positive aspects investing in SRI. Ethical investments have financial returns, but unfortunately very small ones. Anyway, the SRI is expected not to stop growing, because it does not matter that there will be less companies, who aims to get non-financial utility from investing in SRI, it is important that at least some investors would care less about financial performance.

Crisis has led to the increase of financial accounting. One of the reasons for such close accounting implication can be that a company can show very positive ‘success’ indicators to the environment by doing this. Moreover, the information made by accountants is needed for profitable shareholders decisions in global socially responsible investments. Social accounting (social reporting) provides all stakeholders with information about the social and environmental activities and impacts of the organizationit is necessary because it is the way for stakeholders to decide for themselves if a company was really socially responsible or not.Firms ignoring social responsibility may destroy long run shareholder value due to reputation losses and/or potential litigation costs.

Issue like global warming has gained attention by governments and investors around the world. This means that increase in SRI will not stop growing. Environmental reporting is one of two areas where environmental agenda has encouraged the greatest development in organizational practice.The good thing is if the company gets non-financial benefits from SRI, because in that case the investors would not care so much about the money, financial profit, which they can get from these investments. Otherwise the problems with personal or societal values can arise. The question needed to answer is whether the stakeholders care about the values mentioned aboveUnfortunately, social disclosure and social performance are the subjects shareholders care about just in how they affect the financial performance. The ethical positions of organizations, takes just a little part of the things shareholders cares about.

The ethical norms which characterize a company are fundamental to any green investment analysis. They include the integrity of the vision and leadership of top management, and a company’s openness and accountability to its employees and to the outside world.

Companies economic behaviour can be seen in the works it done. The increase in SRI is one of the factors which can determine and reveal whether the company has positive or negative behaviour in investing. Heinkel et al. (2001) suggests looking if company investors are green or neutral investors and whether they have a clean or a polluting technology. The other problem is that the company which is pursuing social and environmental goals can suffer in competitive market. So, both of the profits need to be balanced. SRI must be an investment where part of the returns is donated to good causes.Corporate governance have to reflect the positive screening of the company, it is preferred that company would be focused on social welfare in addition to value maximization.


AVIVA company is one of these companies who cares about their customers, employers and tries to be the right example for everyone in reporting, activities related with environment, behavior which can be called representative for other organizations in successful development. Being the leading organization in Corporate reporting this company seeks to concentrate to positive values and behavior. AVIVA company makes a lot of good works in global warming issue, it is active inside and outside the organization, tries to “infect” the other organizations and people by environmentally friendly behavior and the results is already seen. Of course, only positive and valuable works showed in Aviva’s Corporate reporting makes human doubts about good faith of this company, but otherwise by having a good name this company gain confidence of customers, shows a good example for other insurers and of course the same logics asks a question why such company would harm and disparage its reputationSo, it can be said that this company is the one who understands that it is responsible to control and master the ‘right to knowledge and participation’ which civil society is demanding for.



Dave Owen ‘Green Reporting: Accountancy and the challenge of the nineties’ Chapman & Hall 1992

Gray, R., Owen, D. and Adams, C., Accounting and accountability: Changes and challenges in corporate social and environmental reporting, London: Prentice Hall Europe, 1996

John Houghton ‘Global Warming : the complete briefing ’ 2nd edition, Cambridge University P., 1994

Jose Allouche, Corporate Social Responsibility Volume 1 Concepts, Accountability and Reporting, Basingstoke: Palgrave Macmillan, 2006

Rob Gray, Dave Owen, Keith Maunders Corporate Social Reporting: Accounting and accountability 1987

Rob Gray, Jan Bebbington Accounting for the environment 2nd edition, Rob Gray with Jan Bebbington 2001

Journal articles:

Anne Ellerup Nielsen, Christa Thomsen ‘Reporting CSR – what and how to say it?’ 2007 Aarhus School of Business, Denmark Volume: 12 Issue:1 pp. 25-40

Ainscough, T., Hill, R.P., Shank, T. & Manullang, D. 2007, ‘Corporate Social Responsibility and Socially Responsible Investing: A Global Perspective’, Journal of Business Ethics, vol. 70, no. 2, pp. 165-174.

Experts who put a premium on expecting the worst and working out what it costs NON-FINANCIAL RISK: Mike Scott looks at the mechanisms employed by the insurance industry to minimise the impact of risk on its balance sheet: SURVEYS EDITION 2007, , London (UK).

Garry Booth, ‘Climate change: Talk needs to turn into action’, 2008 Reactions.

Janet M Epps and Fiona L Solomon, ‘Adding Social Value Through Accountability in Mineral Development’ 2000 The AusIMM Annual Conference, Sydney, [online]. Available from: [accessed 20/03/11]

Jean Raar ‘Reported social and environmental taxonomies: a longer-term glimpse’ 2007 Deakin University, Burwood, Australia Volume: 22 Issue: 8 pp. 840-860

McGuire, D. & Garavan, T.N., ‘Human Resource Development and Society: Human Resource Development’s Role in Embedding Corporate Social Responsibility, Sustainability, and Ethics in Organizations’, 2010, vol. 12, no. 5, Advances in Developing Human Resources, pp. 487-507

Ter Horst, J., Zhang, C. & Renneboog, L. 2008, ‘Socially responsible investments: Institutional aspects, performance, and investor behavior’, Journal of Banking & Finance, vol. 32, no. 9, pp. 1723-1742.

Reports and On-line sources:

Aviva plc Annual Report and Accounts 2009, 2008, 2007, 2006 and 2005 [online]. Available from: [accessed 01/03/11]

Accounting for Sustainability. [online]. Available from: [accessed 01/03/11]

Climate care. Treadle pumps in India. [online]. Available from: [accessed 14/03/11]

Climate friendly Hebei Kangbao Wind Project Project Profile [online]. Available from: [accessed 20/03/11]

International Federation of Accountants [online] Available from: [accessed 13/04/11]

Insurance company AVIVA web page [online]. Available from: [accessed 20/02/11]

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Practical Action. Biogas: power from cow dung. [online]. Available from: [accessed 14/03/11]

Special English development report. ‘The Importance of a Simple Water Pump’[online]. Available from: [accessed 20/02/11]

Free Essays

How did Successive Stages of capitalism change the UK’s accounting and financial reporting processes?


According to Bryer, (1998a, 1998b) accounting is a practice whose social foundations are objective and systematic. Its history embraces the social upheavals in the commercial revolution of the sixteenth century and the British Industry Revolution (BIR) that followed. (Bryer, 2000) Financial reporting which is the externally communicated form of accounting has been moulded by successive developments in capitalism. The overall changes in it are relatively apparent since the BIR. (Arnold & McCartney, 2008) It should have a high priority on the research agenda of accounting historians to analysis the accounting for the transition to capitalism. Edwards’ ‘A History of Financial Accounting’ is argues that the most recent ‘leap forward’ in accounting, which states the ‘change in emphasis from record keeping to financial reporting’ with the transition to capitalism.

In this article, the accounting history will be brief stated at first. The stage in accounting development which main follows Edwards will be provided. After then the article discuss the definition, the transition from feudalism to capitalism and Double-entry booking which related firmly to the accounting. The relationship between accounting and Marx’s theory will be stated which focus on the transition to capitalism in England and has many debated. (Bryer, 2000). The next two main parts provide capitalist during the BIR and the two main industries: canal and railway industry. A conclusion will be given at the end of article.

The accounting history:

The history of the transition to capitalism is around the history of accounting. (Bryer, 2000) According to Parker (1984: 5) the accounting history is ‘The study of the evolution of accounting thought, practices and institutions in response to changes in the environment and the needs of society, and of the effect of this evolution on the environment’. There are three main theories contribute to the history of the transition to capitalism: Neo-classical economics in the tradition of Adam Smith; Marx’s theories; and Max Weber and Werner Sombart’s idea of calculative mentality. Sombart and Weber state accounting practice and capitalism is linked first. (Cohen 1981: XVIII) All explanations of the differences between past and current accounting provide a theory of the transition to modern capitalism. Traditional accounting historians usually mirror neo-classical economic explanations of the transition (Miller & Napier, 1991; Napier, 1998). The theme of the accounting history seeks to regard accounting as both a product and a producer of changing socio-economic realities (Miller, Hopper, & Laughlin, 1991). The modes of accounting have strong relationship with organizations and society. (Hopwood 1983: 287, 301) The organizational and social realities are integral parts to understand accounting.

The stages in accounting development:

The development of accounting is usually divided into four periods (Edwards 1989: 9): the pre-capitalist period, commercial capitalism, industrial capitalism and financial capitalism. However, Sombart (1930) divides three stages in the development of capitalism (early capitalism, full capitalism and late capitalism

Pre-capitalist period, 4000 BC–1000 AD.

The need for record keeping initially stemmed from the extensive trade which grew up around the Mesopotamian valleys in this period. The feature of this period is that wealth tended to accrue to the people who held political, religious or military power.

Commercial capitalism, 1000–1750.

Money was invested in stock-in-trade and, when sold for cash, the proceeds were used to acquire more stock is regarded as the core of this period. During this period of commercial capital little was invested in what may be broadly described as fixed assets or productive equipment, except perhaps in the shipping and mining industries. It foreshadowed the BIR of the eighteenth century. (Chatfield: 33)

Industrial capitalism, 1760-1830.

In this period the most important issue is the BIR. It was the use of machines and development of the factory system which marked the emergence of this stage. The industrialists have two accounting systems: single entry and double entry.

Financial capitalism, 1830 to date.

The emergence of this stage is dated from 1830 in which year the Liverpool and Manchester Railway was opened. Financial reporting procedures developed in a substantially unregulated economy and the management was free to choose the methods.

The definition of capitalism:

The word “capitalism” is first written by Louis Blanc in his ‘Organisation du Travail’ in 1850 to distinguish between capital and capitalism. (cited in Deschepper 1964: 153) Proudhon (cited in Braudel 1979: 276) provides a definition of capitalism which puts emphasis on certain ownership system: “Economic and social regime in which capital as a source of income does not generally belong to those who implement it in their own work”. Weber (1991: 297) provides another which refer to the condition for the existence as: “The most universal condition is, for all large lucrative businesses supplying our daily needs, the use of a rational capital account as standard”. In addition, as ‘profit assumes capital’ (Marx 1981: 1022), where we find capital is the basic of bourgeois society and profit is the accounting sign for capitalism. (Weber 1992: 17) It is believed that modern capitalism is dominated by individual capitalists (e.g. Dobb 1946: 18; Gerth & Mills 1948: 68; Hilton 1976: 145; Holton 1985: 66; Kriedte 1980: 9; Mandel 1981: 76; Steedman 1977: 16).

Modern capitalism begins when the English monopoly trading companies, and dates from the joint-stock companies when they change the systems of accounting. Capitalism has an important meaning: “in the capacity to think in the universe of figures and to transform these figures into a well-knit system of income and expenditure” (Sombart 1915: 125). All these are based on the accounting actions and the existence and development of capitalism is precondition for the concentration of monetary wealth as the capitalist mode of production presupposes production for trade (Marx 1981: 444). The another condition for its existence is precondition for our daily need are supplied by all large lucrative businesses and a rational capital account as standard is used (Weber 1991: 297). Scientific, mechanistic technology is widely applied in the full capitalism period (Sombart 1992: 25). The double-entry bookkeeping (DEB) employed to calculating the rate of return on capital is regard as the signature for the social character of capital (Bryer, 1993). Once DEB was completely developed, it became a necessary for the rational capitalism of the second period and established historical a milestones.

Accounting for feudalism and capitalism:

Accounting is to be viewed as a mechanism of accountability within particular social relations of production. The key to understanding the feudal mode of production is that peasants possessed their means of production in Marx’s viewed. In terms of accounting, the implications are clear: the feudal landlord and merchant, pursuing the direct appropriation of surplus labor, will keep income and expenditure accounts. On the other hand the capitalist, pursuing the rate-of-return on capital employed in production by extracting surplus value from the sale of commodities or services produced by wage labor, will keep balance sheets and profit and loss accounts (Bryer 2005: 28) Marx views capitalism as the outcome of the pursuit of monetary wealth within feudalism and appears after peasants became ‘‘free’’ wage workers and faced ‘‘free’’ capital (Marx 1973: 505). It shares same idea with Weber, who explains “rational organization of free labour” as a central factor of capitalism.

Harnessing the merchant’s rate-of-return mentality to the farmer’s mentality of exploiting labor in production gave us the capitalist mentality of pursuing the rate-of-return on capital employed. (Bryer 2005: 30) Driving the social, technological and organizational innovations that gathered pace in the “industrial revolution” of the late-eighteenth century was “the capitalist mentality and the social relations of production it idealized and imposed using factories, machines and accounts” (ibid.: 62). The different power relationships under feudalism and capitalism should be the obvious different forms of accountability according to Bryer (1994). Weber’s theory in the transition of capitalism is also the central idea in modern accounting. The appearance of capital accounting is for Weber a precondition of modern capitalism. Its techniques provide him with an objective representation of its economic ethic and its spirit. It is accepted that accounting could be a prime source of evidence of the calculative mentalities of sixteenth and seventeenth century businessmen (Holton 1985: 116). Accounting became the incarnation of rationality inch by inch, corresponding to the new source of legitimacy provided under high capitalism and is be viewed as a hallmark of modern capitalism. (Chiapello, 2007) The transition from feudalism to capitalism is made visible in accounting calculations.

Double-entry Bookkeeping:

In the eleventh century the single entry is the main original record keeping systems. The single entry were accidental used to prepare the charge and discharge based stewardship report broke down. Trading activity became more dynamic and the number of transactions increased at a rate of geometric progression with the development of the times. In addition, it is argued that unsystematic records limited the size of a business because, beyond a certain point of growth, increasing disorder caused owners to lose control of distant operations. Accounting innovation resulted in the creation of double entry bookkeeping (Sombart 1992: 21).

In 1494 brother Luca Pacioli published his treatise, considered “the first scientific system for DEB in which all previous empirical discoveries were theorized into a coherent, comprehensive representation” (ibid, p. 21) Development of DEB: “each entry is recorded in two accounts, as a debit in one, as a credit in the other. This is the fundamental principle of DEB. Through this system, an enterprise’s accounts are inextricably linked, tightly bound together like a bundle of sticks.” (ibid.: 20) Sombart declares that capitalism and DEB are indissociably interconnected and they are absolutely indissociable, their relationship to each other is that of form to content. (ibid.:23) Weber the distinctive spirit of modern capitalism only came to life by harnessing DEB to the rational organisation of labour in production for profit. He views DEB as a `technical’ precondition of capitalism. (Weber 1964: 195) Both Sombart (1916) and Max Weber share thought that the invention of DEB was essential to the birth of capitalism.

The specific advantages of double entry method are the greater care and correctness it demanded from clerical staff; the increased difficulty of falsifying the books to conceal fraud or theft, particularly where duties were divided among a number of personnel; and the arithmetic check provided by periodically balancing the books and extracting a trial balance. Little use was made of double entry as the basis for preparing financial statements, and surviving examples of profit calculations are few and far between. The operations of capital are inextricably linked between capitalism and one kind DEB practice. Another stage comes up to close the ledger accounts with the introduction of the capital account and a profit and loss account. This is the core of DEB which “can without a doubt be summed up in this objective: keeping track of every movement throughout the company’s capital cycle, quantifying it and recording it in writing” (Sombart 1992: 21). In Britain, the use of double entry became more and more extensive with the growth of trade during the seventeenth century (Edwards 1989:11). From this point the DEB system had already developed in a mature way in the early capitalism period. (Sombart 1992: 23)

Marx and Accounting:

It is impossible to write a history without mention a whole range of concepts linked with Marx’s thought though he had hardly ever mentioned accounting in all his works. (Foucault 1980: 53) Marx tried to define the particular characteristics of capitalism. The links would remain implicit and indistinct how the capital account as standard can require a wage-earning class if without Marx. Sombart and Weber relatively share the same idea with Marx when they describe the capitalist system, especially when they produce a criteria definition. Marx never or hardly mentions accounting, unlike Sombart or Weber, certainly knows more about the accounting practices of his time than other sociologists who were to follow him. The most important fact is that analysis and understanding of the accounting practices of the second half of the ninetieth century played a structuring role in Marx’s thought, which led to the concept of capitalism that was to serve as a basis for Sombart’s proposal on the relationship between capitalism and DEB. Highlighting the conceptual links between accounting and the concept of capitalism, as it originated almost directly from Marx’s theories, opens new horizons concerning the contribution of accounting concepts to the production of economic concepts.

Capitalist during the BIR:

Britain Industrial Revolution (BIR)

In Britain, the nascent capitalism began to come up between 1000 and 1300. The commercial revolution began with a flourish of socialized capital in exploration and privateering in the sixteenth century. It helps England dominate the world since the seventeenth century. Accounting is very popular by archival research into the history of management accounting during that period (e.g., Edwards, 1989; Edwards & Newell, 1991; Fleischman & Tyson, 1993; Fleischman & Parker, 1997). Britain experienced an industrial revolution between around 1760 to 1850 in common viewed (Ashton, 1948; Landes, 1969; Mathias, 1983). It is argued that some kind of ‘revolution’ occurred that changed the trajectory of world economic growth though probably did not achieve a particularly rapid increase in overall economic growth rates during that period (Crafts, 1976, 1985; McCloskey 1994: 243; Mokyr 1999: 2). Britain taught Europe and the world how the miracles of technological progress, free enterprise, and efficient management can break the shackles of poverty and want (Mokyr 1999: 127).

Depreciation accounting

The modern concept of profit maximization is regarded as the tractive force of capitalism (Pollard 1965: 236). The depreciation accounting was introduced by McConnel & Kennedy in 1811. The purpose of it is to hold management accountable for using up the fixed capital the capitalist control. Jones (1985: 159) finds evidence consistent with annual percentage depreciation in the records of the Stanley Smelting Company for 1788/89, and its use by Crawshay in the 1790s. Oldroyd (1996: 7-8) shows that when the Grand Allies collieries calculate the projected unit costs and profits in the early eighteenth century the unit profit was taken depreciation into account, as the capital costs of the mine were apportioned in proportion to output over its estimated useful life.

Fleischman and Parker state that depreciation in product cost and cost saving calculations was not very common until in 1800 the use of depreciation accounting (Edwards & Newell 1991: 52). According to them, most firms were conscious of depreciation (wear and tear) cost, though wear and tear was often amalgamated with interest on capital (1997: 87, 91). Other leading textile firms also used current costs and values in depreciating certain assets at certain times during the first half of the nineteenth century (Fleischman & Parker 1997: 92). On the other hand, Jones (1985: 158) research into early Welsh industrial accounts shows the uses of depreciation are nowhere. He also finds out wear and tear become more familiar as terms in accounting records in the early nineteenth century (Jones 1985: 165). From the 1850s the charge for wear and tear meant the cost of recovering irreparable use-values consumed in production (Bryer, 1991, 1993, 1998).

Standard costs and the integration of financial accounting and cost accounting

Full capitalist accountability arrives with integrated financial and management accounts based on standard costs that reach down to the shop floor. The arrival of several such systems from the 1790s to provide routine data for performance assessment and control, suggests the capitalist revolution was in full swing (Edwards & Newell 1991: 53). Later evidence of large BIR firms employing production and costing standards is abundant and it is after then very common operating (Fleischman & Parker 1997: 42).

The canal and railway industry and the evolution of financial capitalism:

The Canals

The canals were the first industry to utilize the mechanisms of “financial capitalism”. The construction of the canals during seventeenth century and eighteenth century increases the length of the inland navigation system in England and Wales. (Had?eld, 1981, p. 208) The canal companies lay the financial basis of future industrial development through issuing the sale of equity shares, bonds and debentures. Baskin and Miranti argue that the great economic expansion which changed corporate finance in fundamental ways starts in the last quarter of eighteenth century. (Baskin and Miranti 1997: 127; Bagwell and Lyth 2002: 12)

Arnold & McCartney (2008) address the theorizations part of the canal companies’ financial accounting practices response to the transition to financial capitalism. A particularly sophisticated DEB system was introduced by the Birmingham Canal. It involved a wide array of ledgers and registers and including a nominal ledger from which a trial balance was extracted and audited before each shareholders’ meeting (Broadbridge 1974: 126). In 1800, the Rochdale Canal’s made a “State of the Accounts” which consisted of two horizontal accounts and jointly headed “Stock” on the debit side and “Disbursements” on the credit. Kennet and Avon in 1817 provides a “General Account”, as an early example of the General Balance Sheet, although this seems to exaggerate the range of information it contains (Edwards 1985: 30). All of these operating statements in the canals provide the evidence of movement towards accruals-based accounting (Arnold & McCartney, 2008).

The Railways

In 1830, the Liverpool and Manchester Railway opened for business, in which year the ‘financial capitalism’ comes out (Arnold & McCartney, 2008). The railways are mainstay industry in nineteenth century economy. They are treated as most important place in accounts of the evolution of financial reporting (see also Bryer 1999: 687, 2000: 158). Railways company need for large quantities of capital investment, much of which was externally financed, was similar to canals. According to a study of the ten largest UK railway companies’ evolution of the financial reporting in the period from 1840 to 1855, there are some evidences of adjustments in the conceptual basis of the accounts (from cash to accruals), even though in a “gradual, piecemeal and inconsistent manner” (McCartney and Arnold 2002: 413). Edwards (1989) stress the railways act an important role in the transition to ‘financial capitalism’ and stand for the start of industry-wide ‘financial capitalism’.


This article offers the relationship between capitalism and UK’s accounting and financial reporting processes. As shown above, DEB acts an important role in the transition of the capitalism. DEB is the control and ideal synthesis of the process. It becomes the more necessary the more the process assumes a social scale and loses its purely individual character (cited in Miller 2000: 9). In view of the eminent position occupied by the concept of capitalism in both past and present intellectual and political debates and current analyses of economic modernity, the fascinating role played by accounting craft in the birth of this concept certainly merits attention.

Dick Edwards argues that financial reporting emerged with the transition from “industrial” to “financial capitalism” from an agency precept (cited in Arnold & McCartney 2008). Accounting did not develop into its present state in a straightforward and orderly fashion. Major changes have usually been achieved as the result of numerous pragmatic adjustments to new circumstance. Sometime the change in accounting does not necessarily mean progress. For instance, the financial reports published by companies in the 1920s became more secretive and obscure than had previously been the case. More recent events, computerization and rapid inflation also raise new problems for accountancy and the accountant. All of these push the accounting change its process.

Free Essays

Critique for ‘Teaching ethics in accounting and the ethics of accounting teaching


Do the authors have the capability to write this thesis?

Yes the authors have the capability to write on this thesis; they have the academic experience to make authoritative claims on accounting education. Gray, et al. (1994) have passed their views across based on extensive research and personal experience. Gray, et al. (1994) won the British Accounting Association Special Interest Group Manuscript Award for writing this paper. Rob Gray the main author of this paper is now a Professor of Social and Environmental Accounting Director of the Centre for Social and Environmental Accounting Research at St Andrews has authored/co-authored over 250 books, monographs, chapters and articles (University of St Andrews School of Management website, 2011).

Issues raised by Gray, et al. (1994) in ‘Teaching ethics in accounting and the ethics of accounting teaching: educating for immorality and a possible case for social and environmental accounting education’

An issue raised in this paper is that despite the current success of current accounting there is still evidence of ethical and intellectual failure among accounting practitioners (Gray, et al., 1994). The immediate blame is on the accounting educators as they have seen evidence that accounting education fails to develop students’ intellectual and ethical maturity (Gray, et al., 1994). According to Gray, et al. (1994) educators do not seem to understand the consequences of not having ethics as a core content of an accounting degree; hence graduates are not prepared for employment as an accounting trainee. Along with personal experience and evidence they got from (Sterling 1973, Lehman 1988, AECC 1990, Sikka 1987) Gray, et al. (1994) suggests that university teaching practise tends to be dominated by techniques acquisition. The inadequacy of university accounting education according to Gill, (1993) is the reason why graduates are neither practically trained individuals who cannot evaluate reason conceptualize and evaluate hence cannot be immediately used in the office (Gray, et al.,1994).

Methodology: is the methodology used able to make a persuasive case?

I will go through the methodology used by Gray, et al. (1994) also bringing in other academic research that agrees, and others that bring another perspective to the issues addressed. Gray, et al. (1994) looks at educational theory and accounting education and have discovered that accounting educators have paid emphasis to teaching method but accounting literature does not emphasize the learning theory in accounting education. They have looked into the work of Shute (1979) and Ainsworth and Plumlee (1992) where Blooms taxonomy of learning is used to look at accounting education and there is evidence that students are not encouraged to progress the levels of taxonomy and may reinforce lower levels of cognition (Gray, et al., 1994). Their findings suggest that accounting education does not make students reach the highest levels of cognition evaluation which involves making judgements on materials, information and method (Ainsworth and Plumbee, 1992 as cited in Gray, et al., 1994). Gray, et al., (1994) states that ideally accounting education should be at the deep approach/deep-elaborative/transforming/formal-operational but instead it is perceived to be on a low level of Entwiste, et al., (1992) adaptation of learning approaches surface; approach/shallow-reiterative/reproducing/concrete-operational. Gray, et al., (1994) have looked at Kohlberg’s levels of ethical development and discovered with backing including (Rest, 1974, 1987; Rohatyn, 1987) age, gender, childhood, background and years in education are the most favoured determinants of ethical maturity. I have found that some researchers even believe that it is too late to teach ethics at university stage and that ethics education does not necessarily translate to ethical behaviour (Bean and Bernadi, 2007).I have found evidence from Ameen, et al. (1996) who surveyed students in upper-level accounting courses in 4 large public American universities that suggests that female accounting students are more ethically sensitive than their male counterparts. Age and gender is another perspective that should be considered when looking at the future of ethics in accounting education.

Gray, et al. (1994) find evidence that suggests that accounting education is only on the first two levels of Kohlberg’s level of ethical development which is ‘Heteronomous morality’ and ‘Individualism and instrumentalism’. Educators should be questioned as to why accounting education is not reaching the higher levels of Kohlberg’s. Without ethics in the core curriculum it is not likely that accounting education will ever contribute to ethical development or produce what is necessary for deep learning (Gray, et al., 1994).However I have found other measures of ethics in accounting education that Gray, et al. (1994) has not looked at such as the DIT and the Mach IV scale. The Defining Issues Test (DIT) is the primary measure of ethical concern and is in most accounting ethical research (Pope, 2005). Another measure of ethics is the Mach IV it is well-validated but is not commonly used in accounting ethics research (Pope, 2005).

I have found evidence that suggests that accounting academics are less committed to ethics and ethical education is mostly restricted to discussion of professional codes of auditing courses whereas other professions like law and medicine have always had a long tradition of ethics courses (May,1994; Pallegrino, et al., 1990 as cited in Gunz and McCutcheon 1998). McNair and Milam (1993) who did a survey on 202 schools most of which were accredited by AACSB (Association to Advance Collegiate Schools of Business) found that although majority agreed that ethics should be covered more in accounting education only 8.3% believed it should be taught as a separate course. McNair and Milam (1993) study suggests that accounting education does make ethics significant, with the faculties who already incorporated ethics as part of another course only spending an average of 3.18 hours teaching it. Gray, et al. (1994) find results that reveal that business ethics courses are indeed present in some undergraduate accounting degrees, and is still growing although at a negligible rate. More recent studies form Bernadi and Bean, (2005) even suggest a three-course system for teaching ethics in accounting education including a foundation course, a general business ethics course and a discipline specific course (Bean and Bernadi, 2007).Up until recent times it has been suggested by a number of researchers that the Anglo-American accounting education constrained approach to accounting and business education to maximising shareholders wealth has limited the supposed benefits of add-on courses in business ethics (Ferguson, et al., 2011). It has been suggested that the ethical lapses resulting in the scandals that embarrassed the accounting profession notably the Arthur Anderson and Enron scandal in 2002 may be as a result of students believing that cheating is an acceptable, and perhaps necessary, form of competition (Bean and Bernadi, 2007). I am happy to have found evidence that suggests that post-Enron accounting university students are now more concerned about the corporate ethical structure of the firm they choose to work for (Esmond-Kiger, 2004).

Loeb’s goals of accounting ethics education is used to show how ethics and morality can be educated in accounting education (Gray, et al., 1994). Gray, et al., (1994) introduce three ways without any hierarchy of accessing wrongness or action ‘Cosequentionalism’, ‘Motivism’ and ‘Deontological’. Concentration of the accounting profession lies within Consequentionalism which assesses actions by reference to the utility they generate (Gray, et al., 1994).

Possible Solutions to the issues raised by Gray et al, 1994

Gray, et al., (1994) suggests that the solution of issues they have raised may lie within social and environmental accounting which challenges much of the approach of traditional accounting education. They find that although the solution would be to incorporate ethics in accounting education the focus is also largely inseparable from (1) ethical responsibility of the teacher to seek maximum educational development in the student and (2) the apparent relationship between ethical and educational development (Gray, et al., 1994). I found evidence too that also suggests social and environmental accounting and alternative forms of accounting should be taught more to accounting students with the same level of emphasis as traditional accounting (Mathews, 1997).Students have resistance to social and environmental accounting because they do not find it to be immediately relevant and it is seen to be about ‘what accounting is not’ and ‘what accounting can be’ as opposed to ‘what accounting is’ (Gray, et al., 1994). I have read Webber (1990) who gives evidence that some ACCSB schools have already responded to these challenges by offering business ethics courses and the reason why more business schools may be failing to introduce ethics to their curriculum is because academic literature has failed to evaluate the effectiveness of the courses. Another possible solution to the issues raised by Gray, et al. (1994) that has not been considered in this paper is that there should be more literature that show backed up evidence that ethics in accounting education produces graduates that are more intellectually and ethically capable in their accounting trainee jobs.


Despite the extensive research Gray, et al, (1994) questions are left unanswered and the paper is concluded in an inconclusive way asking more questions to themselves and other accounting educators. After reading this paper and understanding the issues raised and evaluating the possible case for social and environmental education and other views from academic research I have read I have one questions for Gray, et al. (1994): With Professional Accounting Bodies like ACCA having ethics courses as a requirement to become a qualified accountant is it fair to still blame the accounting university education for the ethical and intellectual failures among accounting practitioners?


*Gray, R, Bebbington, J, McPhail, K, 1994 Teaching ethics in accounting and the ethics of accounting teaching: educating for immorality and the possible case for social and environmental accounting’ Accounting Education 3 (1), 51-75

ACCA, 2011 Professional Qualification, Business Ethics Course Description [online] Available at: [Accessed 12 March 2011]

Adkins. N., Radtke, R.R., 2004 Students’ and Faculty Members’ Perceptions of the Importance of Business Ethics and Accounting Ethics Education: Is There an Education GapJournal of Business Ethics 51: 279-300

Ameen, E.C., Guffey, D.M., McMillan, J.J., 1996 Gender Differences in Determining the Ethical sensitivity of Future Accounting Professionals. Journal of Business Ethics 15: 591-597

Bean, D.F., Bernardi R.A., 2007 Ethics Education in our Colleges and Universities: A Positive Role for Accounting Practitioners. Journal of Academic Ethics 5:59–75

Bean, D.F., Bernardi R.A., 2006 Ethics in Accounting Education: The Forgotten Stakeholders. The CPA Journal [online] Available at: [Accessed 12 March 11]

Esmond-Kiger, C, 2004 Making ethics a pervasive component of accounting education. Management Accounting Quarterly [online] Available at:;col1 [Accessed 12 March 2011]

Ferguson, J, Collison, D, Power, D, Stevenson, L, 2011 Accounting Education, Socialisation and the Ethics of Business. Business Ethics: A European Review [e-journal] 20 (1) 12-29 Available through: Wiley online library [Accessed 12 March 2011]

Gunz, S., McCutheon, J., 1998 Are Academics Committed to Accounting Ethics EducationJournal of Business Ethics 17: 1145-115

McNair, F., Milam, E.E., 1993 Ethics in Accounting Education: What is Really Being Done. Journal of Business Ethics 12: 797-80

McPhail, K, 2001 The Other Objective of Ethics Education: Rehumanising the Accounting Profession. A Study of Ethics Education in Law, Engineering, Medicine & Accountancy. Journal of Business Ethics 34: 279-29

Mathews, M.R., (1997) “Twenty-five years of social and environmental accounting research: Is there a silver jubilee to celebrate?” Accounting, Auditing & Accountability Journal, 10 (4), 481-531

Pope, K.L., 2005 Measuring The Ethical Propensities Of Accounting Students: Mach IV Versus DIT. Journal of Academic Ethics (2005) 3: 89-111

University of St Andrews Management School 2011 [online] Available at: [Accessed: 12 March 2011]

Weber, J, 1990 Measuring the Impact of Teaching Ethics to Future Managers: A Review, Assessment, and Recommendations. Journal of Business Ethics 9: 183-190

Free Essays

SWOT and Accounting Analysis of ASDA



ASDA stores limited was founded as Associated Dairies and Farms Limited in 1949 and it is basically an abbreviation of Asquith and Dairies (ASDA). In 1965 ASDA gets merged with the Asquith chain of three supermarket and Associated Dairies. ASDA introduced his first concept of the superstore in 1965. In the mid of 1980s ASDA started to expand his warehouse stores to face the fresh food selection sets by its competitors. In the late 1990s the ASDA had its 220 superstores in Britain which helps ASDA to become famous and popular. The basic origin of the ASDA is that they was formed by the English dairy farmers to protect themselves from the falling milk prices after first world war. After First World War when the price of milk gets in control a dairy farmer from Yorkshire named J.W.Hindell made Hindell Dairy Farmers Limited which deals in both wholesale and retail outlet of milk. In March 1949 it becomes a public company as Associated Dairies and Farm Stores Limited. Itincludes some 26 farms, three dairies, two bakeries, 42 retail shops, and pork-butchering facilities (

Product of ASDA

ASDA stores deals in almost every product which comes under the daily life. The products of ASDA are highly trusted in quality. ASDA sells food item which includes milk, fruit, vegetables, meat, frozen foods juice, music cds , pharmacy and drinks. The quality of their products are the best in the entire market of UK. ASDA has also included the electronic product like laptop, music player, mobile phones and other electronic gadgets. They also sell the jewellery item. Its product is available in low price from the market which makes ASDA leading grocery store globally. Competitors

ASDA has many competitors in the market such as Tesco, Safeway and Sainsbury are the main competitors of ASDA. ASDA has still maintained its status in the market by maintaining the quality of the product and the lowest price which makes ASDA on the top list of the UK market. They maintain their status so well that they didn’t change their products quality. They believe in giving 100 % customer satisfaction and they even don’t take it lightly.


ASDA only deals in supermarket not in manufacturing of products. The company buy the product from the farmers directly and sells those products in its stores by maintaining it quality. The customer selected the product which are placed in the food stalls, and take those products to the cash counter for the payment. If the customer is not satisfied in the product he can replace it at the same store. ASDA not only deals with food items they sell textiles, from where they earn majority of their revenue, they basically out sourced their textile products from Pakistan, India and Bangladesh. ASDA also do produce their own valued item in foods and confectionary.


ASDA Company had policies which follows the law and regulations. There laws and regulations are very strict in the terms of quality of their product. If the customer is not happy and satisfied with any product which they brought from ASDA like home and leisure, grocery, fresh or frozen items they can return the product and they will offer a full refund or replacement of their product. The receipt or proof of purchase is preferred but not essential in ASDA stores. There are some more rules and regulation applied for their different products like Electrical products, entertainments items (music, Films and games), fashion items range and in pharmacy also. If the customer is not happy with these items they have to returned these items in 20 days from the date of purchase (

Management Accounting Techniques:

Methods and techniques

There are many methods and techniques in which we understand the management accounting some of them are as follows.

Activity based costing

Activity based costing is basically used for measuring activities and cost of consuming resources. Activity base costing is an activity which is generally based in the capacity of the manufacture. It is used to calculate the unit price of the product, costing of activities in the terms of variable and fixed cost.

ASDA is good in calculating its Activity based costing which helps in calculating cost at each activity such as supply chain cost, ware house cost etc which ultimately helps in minimizing cost at each activity and helps in maintaining overall cost.


Budgeting is very important technique which organizations adopt for their management accounting, whether it is small or big orgainzation in terms of planning, coordination, motivation, coordination, control, communication and in performance evaluation. It helps organization in order to control its expenses and cost. It is very helpful for the company to make a rough comparison between the income and expenditure of company on monthly basis. For the budgeting manufacture of the ASDA they include production, administration and sales budgeting. Budgeting is prepared into two ways (David Hobbs; Management Accounting).

Periodic budgets
Continuous or rolling budgets

Periodic budget:

Periodic budget are those which are made for period of time, that period can be of one year, or either for quarters, it depends how big the organization is and how vulnerable its sales figures over the year.

Continuous or rolling budget:

Continuous or rolling budgets are those budgets in which there is master budget, which is usually for an year, and after each quarter or four months the the budget for next quarter is added into master budget (David Hobbs; Management Accounting).

As far as ASDA is concerned ASDA adopts the continuous or rolling budget, where they maintain the master budget for an year and in order to be competitive with other major competitors rolling budget should be revolved around their master budgets which helps in maintaining the plans according to change .

Job Ordering Costing

Job ordering costing method is basically the production in each time period. It is calculated by dividing the number of units in job by the total cost of job.

ASDA is a big organization where job ordering costing doesn’t applies as much they are basically supplying products in large quantity.

Recommendations for ASDA (Budgeting):-

ASDA adopts the budgeting technique which is explained above their major focus is on the rolling budgeting, which helps in estimating cost for each quarter. Budgeting is that one tool which makes relevant information and estimation about each department. It also creates a motivational factor among all the stake holders.

Budgeting has internal and external influence on growth of an organization and it helps in overviewing their plan to grow in international market such as in south Asian countries (Pakistan or India).

Rolling budgets are helpful in analysing financial control decision and helps in estimating overall cost for the whole year which can be changed according to sales figures of last quarter.

Job ordering is the least demandable for the ASDA because allocation of prices to each single thing is difficult such as overhead costs, direct costs.

According to the ASDA continuous growth showing to us that job ordering costing system is excellently managed by ASDA.

Activity based costing (ABC)

Activity based costing is a useful technique which is used to allocate cost according to product and services which helps in planning and monitoring.

ASDA should follow (ABC) because it is a new system for allocating prices to products and services. The usual accounting system is now obsolete and nowadays ABC is now mostly adopted as it has good control over pricing and costing.

Capital investment decision is also least concerned for ASDA because in its financial planning it is already settled and as a proof of the ASDA’s balance sheet is showing a continuous growth since last 3 years. ASDA has over all managed its budget quite well, because its continuous expansion and growing showed the credibility of the budgeting system. Budget is the key element for ASDA to manage its global operations.

SWOT analysis:-

SWOT analysis is used for identifying potential strengths and weakness for organization. SWOT analysis which is done accordingly.

This report is overall based on the personal reflection which I obtained from data related to ASDA which was easily accessible to be. This report doesnt only deal with fact and figures related to ASDA but give the recommendation relating ASDA management accounting technique. The major focus is on the budgeting technique that how ASDA is implementing budgeting technique to it its company and explains why rolling budgeting concept is applicable to ASDA and why it is the point of focus.

The other major technique which was considered for management accounting of ASDA is Activity based costing and how it helps an organization to maintain its costing. It also do explains why Job order costing is not applicable to ASDA.

The weakness which one might think about this analysis is the resources were quite limited and all consideration was made on personal obseravation and knowledge which I posses. The job order costing could be implemented but as my scope was limited so, I didn’t able to job order costing and its also not applicable for big company like ASDA.


History of ASDA group plc; Reference for Business, [Accessed on 26th May, 2011]

Exchange and Refunds; Your ASDA, [Accessed on 26th May, 2011]

ASDA Direct; [Accessed on 26th May, 2011]

David Hobbs & Hugh Coombs; Management accounting: principles and application (book), 2005 SAGE Publications Limited [Accessed on 25th May, 2011]

Peter Atrill & Eddie McLaney; Management Accounting: An active learning approach, Blackwell Publishing 1994 [Accessed on 25th May, 2011]

ASDA History; [Accessed on 25th May, 20

Free Essays

In contemporary society, it is generally acknowledged that there is a compact relationship between the process of accounting and successive stages of capitalism.

1. Introduction
In contemporary society, it is generally acknowledged that there is a compact relationship between the process of accounting and successive stages of capitalism. Then, according to Sombart (1916), the notion of double entry bookkeeping has influence on the emergence of capitalism. Consequently, this viewpoint can arouse a great controversy. Some researchers agree Sombart’s argument and launch a deeper study between the accounting and capitalism. In addition, Chiapello (2007) also states that there is the association between the conception of capitalism and the angle of economy and society which is impact on accounting.

Moreover, it is argued that the capitalism revolution has deeply impact on the history of accounting. So, there is an interconnected relationship between the process of accounting and successive stages of capitalism.

This essay will elaborate the issue about the role of accounting plays in successive stages of capitalism. In the first section, it will give the conception of capitalism and state two stages of capitalism. Second part gives the conception and development of accounting. Then, the relationship between them is given in the next section. Finally, it can be conclude that the history of accounting has influence on capitalism through the case of canals and railways in UK.

2. A review of Capitalism

2.1 The conception of Capitalism

Initially, as Deschepper (1964) states, capitalism was first proposed by Louis Blanc in the second half of nineteenth century and it is required to separate from the capital. Afterwards, Chiapello (2007) argues that the word capitalism can be turned into the antonyms of socialism during the twentieth century. Then, Sombart (1930) gives a clear definition on the basis of social scholars: ‘Capitalism designates an economic system significantly characterized by the predominance of “capital” ’ (Sombart, 1930, p.4).

Secondly, according to Weber (1991), capitalism is defined that ‘the most universal condition for the existence of modern capitalism is, for all large lucrative businesses supplying our daily needs, the use of a rational capital account as standard’(Weber, 1991,p. 297).

From the angles above, it can be concluded that most scholars cannot clearly propose the word capitalism even though capitalism has its definition according to their own thoughts. For example, Marx just used the expression of ‘capital system’ or ‘capital production’ rather than the word capitalism.

2.2 Capitalism and two stages

It is witnessed that there is an energetic view about the capitalist revolution with the development of business history. Consequently, according to Wilson (1995), it is widely accepted that capitalism can be divided into two stages on the basis of different categories of management: the traditional form of capitalism and the managerial capitalism.

To begin with, Wilson (1995) claims that it is clear that early capitalism is described that an individual can play various roles in operating the company from the perspective of personal management. So, it is the traditional form of capitalism. For instance, according to Mantoux (1928), the manager tends to have various powers to operate the company and the powers contain the rights for businessman or salesman. From the perspective above, it is obvious that most the corporate affairs can usually be dominated by an individual or small management teams until management functions can be separated.

Moreover, as Wilson (1995) states, the managerial capitalism is viewed as the second stage, but there are two periods in the managerial capitalism: the entrepreneurial form of organization and the managerial form of organization.

Firstly, it is apparent that a company transforms from individual forms to form of enterprise because personal management form has itself internal and external limits and it seems that the development of organization can be restricted. So it is the entrepreneurial form. In this stage, the owner-manager tend to need to hire professionals and use external funding and it seems that ownership and control start to emerge a separation in order to improve management functions.

Finally, the managerial stage is regarded as the second period as Wilson (1995) asserts. It is well known that there is a complete separation between ownership and control. That is to say, professional manager should commit strategic, functional and operational management while investors can control most of stock equity which operates the company.

3. A review of Accounting

3.1 The conception of Accounting

Initially, according to Young (2006), American Institute of Accountants’ Committee can provide an official definition: ‘Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof ’ (cited in Grady, 1965, p. 2).

Secondly, as Bryer (2006) claims, accounting is defined that there is a kind of process which offer useful accounting information for investors and senior managers. Obviously, accounting is regarded as a kind of looking for the common economic purpose of the reasonable and dominant method (Bryer, 2006). Afterwards, it is obvious that all the accounting information can be made reasonable economic decisions for the future development of the organization as Bryer (2006) demonstrates.

Thirdly, McLaney and Atrill (2007) provide another conception of accounting: it is evident that it can collect many useful available financial data, use a certain method to analyse these information and report to managers in the form of financial statement. Then, managers can make full use of these data to make the right economic decisions for the progress of the company.

Therefore, from these angles, it tends to conclude that there are the common features in terms of the definition of accounting. In other words, it is well known that accounting is the process of collecting and analyzing the financial data for managers and managers can make use of these information to make economic decisions for the company.

3.2 The development of Accounting

Along with the progress of business, it is widely believed that accounting has been constantly developing. Therefore, as Edwards (1989) states, there are four stages in terms of the progress of accounting: the pre-capitalist period, the commercial capitalism, the industrial capitalism and the financial capitalism.

Firstly, according to Edwards (1989), the first stage is pre-capitalist period, which dates from Mesopotamian civilisation until the Greek civilisation (4000 BC -1000 AD). Then, the first form of accounting is a simple record keeping and it origins from the Mesopotamian trade. For instance, Edwards (1989) illustrates that the original method is that the knotted cord keeps records, but this record evolves into keeping the minute on the ceramics or paper with the development of society. Hence, it means that there appears an initial form of calculating profits in terms of recording the goods and cash in this stage.

Secondly, Edwards (1989) claims that commercial capitalism is regarded as the second stage. This stage begins from 1000 to 1750. It is defined that merchants use money to purchase raw materials rather than number of production equipment and finish the goods, and make a big profit to obtain more shares after selling the products in this period. Then, it is described as “circulating capital”. So, it is also called the original commercial form. Moreover, it is worth to point out that there appears a new way of record keeping which is called double entry booking from about 1300 and then this method becomes more and more prevalent after 1494.

Thirdly, as Edwards (1989) states, the third stage is known as industrial capitalism. This stage normally dates from 1760 to 1830 in Britain even though industrial revolution had different periods in various countries. Afterwards, it is commonly accepted that the progress of mass machinery and factory marked the birth of industrial capitalism due to the emergence of new energy in the mid-nineteenth century. In addition, it is obvious that rich labour resources also promote the capitalist industrialization because of low infant mortality and the enclosure movement and then textile industry with ceramic and transportation appear constantly. Hence, it can be seen that manufacturing is the main proceeds in this stage. On the other hand, it is of importance that single entry and double entry can be chosen at that time from the perspective of industrialists, however, double entry replaced eventually single record keeping due to the improvement of resource allocation even though single entry maintains the leading position in Britain until nineteenth century.

Finally, financial capitalism is viewed as the fourth stage according to Edwards (1989) and this period starts from 1830 until today. It is notable that public services, like railway building, tend to become the preliminary stress on capital rather than fixed capital in terms of financing at this stage. Furthermore, it seems that public services can be required abundant of money rather than carrying on activities on small scale. Obviously, accounting problems such as the division of capital costs and tax costs, calculating profits, the evaluation of fixed assets tend to be constantly emerged. At that time, there are same accounting problems between mechanical inventions and technological inventions because of financing. In the end, government has transformed the attitude about the rule of business activities and it means that financial data are required while managers tend to choose suitable methods in terms of financial reporting procedures.

4. The relationship between Capitalism and Accounting

According to Wilson (1995), it is witnessed that there is an energetic view about the capitalist revolution with the development of business history.

Furthermore, as Chiapello (2007) states, it is evident that to a large extent the emergence of accounting can lead to the notion of capitalism. Then, Chiapello (2007) also asserts that there is the association between the conception of capitalism and the angle of economy and society which is impact on accounting. At the same time, Sombart (1916) claims that as the record keeping method of accounting, the notion of double entry bookkeeping has influence on the emergence of capitalism.

In addition, Bryer (2000) suggests that there is the theory of Marx which emphasis on the history of accounting and the transformation of capitalism. So, it means that the history of accounting is closely associated with the transformation of capitalism.

Finally, according to Arnold and McCartney (2008), it is argued that series of developing capitalism has impact on the external form of accounting about financial statement during the industrial revolution in Britain.

Therefore, from these perspectives, it can be concluded that there is the common characteristics between the accounting and the capitalism. That is to say, firstly, it seems that along with the development of the business history, accounting can constantly emerge in the capitalist revolution and it also facilitates the notion of capitalism. Secondly, it is evident that the double entry bookkeeping also comes out with the progress of accounting and it is deeply connected with the appearance of capitalism.

Due to the development of capitalist revolution, there appears a new method of bookkeeping under the changing circumstance. Consequently, according to Edwards (1989), it is obvious that small businesses tend to use single entry to keep the trading activities in the eleventh century and this record keeping can make small businesses operating well. However, due to the increasing business activities and the growth of amount of trading, it seems that single entry may restrict the size of business. It is thus well known that double entry bookkeeping tend to come out from about fourteenth century and it would become increasingly popular in 1494. Then, double entry is widely used in UK in the seventeenth century because of the increase in the number of transaction.

To start with, as Sombart (1992) states, double entry bookkeeping is defined that there are two accounts in every entry. That is to say, one is the debit account and another is the credit account. It is also the basic rule of double entry. As is seen that double entry bookkeeping would closely together with the accounts of enterprise.

In addition, Sombart (1992) asserts that the capital account and the income account start to appear and it is the core of double entry bookkeeping. At the same time, DEB is given an objective: ‘keeping track of every movement throughout the company’s capital cycle, quantifying it and recording it in writing’ (Sombart, 1992, p.21). Chiapello (2007) claims that close annual account put forward for the first time from the textbook of Simon Stevin and the balance sheet was proposed according to double entry bookkeeping.

However, Yamey (1964) also gives another definition of double entry bookkeeping: initially, there is the sole standard about the balance of debit and credit accounts in terms of the balance system of bookkeeping. Secondly, this system adds the use of capital accounts and nominal accounts, but regular calculation of net income has not been enrolled.

As a result, from these perspectives it can be concluded that there is the development of double entry bookkeeping in early capitalism stage and the conception of double entry bookkeeping. That is to say, firstly, it is defined by Sombart and Yamey that double entry bookkeeping can be divided into two accounts. Secondly, double entry bookkeeping tend to be come out because of expanding increasingly the size of businesses.

5. Accounting changes during the Industrial Revolution in Britain

As Arnold and McCartney (2008) claim, financial statement which is an external form of accounting has formed in the successive stages of capitalism and it is obvious that financial reports have sort of changes in terms of railway and canal industry during the initial period of industrial revolution.

5.1 Railway

According to Arnold and McCartney (2008), it seems that the establishment of railway enterprise such as Liverpool and Manchester railway mark the appearance of financial capitalism from 1830. As an illustration, Edwards (1989) states that the requirement of public utilities tend to turn into the primary pressure of capital instead of fixed capital during the Industrial Revolution. So, for the sake of large scale financing, two railway buildings, Liverpool and Manchester railway, was found in 1830. The London Stock Exchange can place importance on corporation securities during the second half of nineteenth century and it can represent the importance of railway in terms of the capital market. At that time, as the railways were the major industry during the second half of nineteenth century according to Arnold and McCartney (2008), the construction of railway was required to invest amount of capital rather than a small scale. So, plenty of financial data can need to be reported in the financial statement. Then, these data can contribute to design the project, calculating costs in the period of construction and finally these information were reported after the completion of the railway line (Edwards, 1989).

5.2 Canal industry

The canal industry plays a significant role in the UK economy during the start of nineteenth century and it also has impact on the industrial revolution. According to Edwards (1989), the canal industry may mark the real commence of financial capitalism because it make use of surpluses from the employment of capital in trade and capital from the investors.

As Bagwell and Lyth (2002) states, the establishment of the canals can be miracle during the late eighteenth century and the early nineteenth century and civil engineering with pound locks, aqueducts, cuttings and tunnels tend to be performed in the canal buildings. Then, Arnold and McCartney (2008) assert that the age of canals dated from 1755, for the sake of enhancing navigation of Sankey Brook which is a tributary of the Mersey, Liverpool Company acquired a navigable Act and the coals can be transported to Liverpool from the St Helens. So, it can also facilitate the progress of the Bridgewater canal from Manchester to Worsley. However, according to Bagwell and Lyth (2002), the cost of coal sharply decreased in Manchester when canal was built at the July of 1761. Subsequently, a better alternative of Manchester Runcorn Canal can be facilitated by the Bridgewater canal in 1767 and recently the carriage levies started to drop as well. Simultaneously, it is accepted that new canals have not only the function of transporting the cargo, but they can also be regarded as the transportation of passengers due to the introduction of the Manchester passenger boats in the late of eighteenth century (Arnold and McCartney, 2008). In addition, as Hadfield (1981) mentions, it is witnessed that from the angle of canals, there is a growth of inland navigation system between England and Wales from 1,482 miles to 3,969 miles during the late eighteenth century and early nineteenth century. Hence, it is defined as the stage of industrial revolution.

However, as Arnold and McCartney (2008) claim, the Bubble Act can be proposed by an Act of Parliament and there are some limitations from the angle of joint stock company since the failure of South Sea company. Afterwards, the first corporation, which is named The Company of Proprietors of the River Dun, was established in 1733 by this Act and this company has the total ? 17,250 capital. Therefore, it means that the canal companies can be viewed as “statutory companies, for trading purposes” for the first time and there are limited liabilities in some corporations(Harries, 2000, pp.98-9). From these perspectives above, it can be concluded that the canal companies tend to make a financial foundation for future industrial process as a means of selling stocks and bonds (Bagwell and Lyth, 2002).

Although some canal companies have some certain data such as construction costs and dividends, it is clear that the periodic accounts or financial statements are used to search for understanding the profitability (Arnold and McCartney, 2008). Additionally, the Rochdale and Lancaster directors insist to keep “proper books of Accounts” while the directors of the Kennet and Avon adhere to use the cost of construction about “a true and particular Account”. Then, it is also mentioned that the data set of three companies such as Birmingham, Kennet and Avon, and Oxford Canal companies can totally use the DEB to keep accounting records.

In brief, according to Arnold and McCartney (2008), it is obvious that there are two financial statements in the Rochdale Canal, which are Statement of the Receipts and Disbursements and Statement of the debits and credits. Then, Arnold and McCartney (2008) also state that the Kennet and Avon’s general account is the initial form of General Balance Sheet even if it cannot include relevant information.

6. Conclusion

Based on the arguments offered above, the development of accounting has far-reaching effects on the successive stages of capitalism especially in the period of British Industrial Revolution. Sombart (1916) claims that the notion of DEB has influence on the emergence of capitalism. In addition, Chiapello (2007) also states that there is the association between the conception of capitalism and the angle of economy and society which is impact on accounting. As a result, it is clear that along with the development of the business history, accounting can constantly emerge in the capitalist revolution and facilitate the notion of capitalism. Then, it is evident that the double entry bookkeeping also comes out with the progress of accounting and it is deeply connected with the appearance of capitalism.

Therefore, based on the case of canals and railways in Britain, it is evident that the process of financial reporting has far-reaching effects on the stages of industrial revolution. Meanwhile, the history of accounting may pose an essential impact on the stages of capitalism.


Arnold, A.J. and S. McCartney (2008) ‘The transition to capitalism and its implications for financial reporting: evidence from the English canal companies’ Accounting, Auditing and Accountability Journal 21 (8): 1185-1209

Bagwell, P. and Lyth, P. (2002) Transport in Britain. London: Hambledon and London.

Bryer, R.A (2000) ‘The history of accounting and the transition to capitalism in England. Part one: theory’ Accounting, Organizations and Society 25:131-162

Bryer, R. (2006) ‘Accounting and control of the labour process’ Critical Perspectives on Accounting 17: 551-598

Chiapello, E. (2007) ‘Accounting and the birth of the notion of capitalism’ Critical Perspectives on Accounting 18: 263-296

Deschepper, E. (1964) L’histoire du mot capital et de ses derives. Facult?e de Philosophie et Lettres. Bruxelles, Universit?e Libre de Bruxelles, m?emoire de recherch?e. Bruxelles: Philologie Romane.

Edwards, J. R (1989) A history of financial accounting. London and New York: Routledge.

Had?eld, C. (1981) The Canal Age, 2nd ed. Newton Abbot: David & Charles.

Harris, R. (2000) Industrializing English Law. Cambridge: Cambridge University Press.

Mantoux, P. (1928) The Industrial Revolution in the Eighteenth Century. Jonathan Cape.

McLaney, E. and P. Atrill (2007) Accounting: an Introduction (4th edition). Prentice-Hall

Sombart, W. (1916) Der moderne Kapitalismus. M? unchen, Leipzig: Duncker and Humbolt.

Sombart, W. (1930) Capitalism. In: Seligman ER, Johnson A, editors. Encyclopedia of the social sciences. New York: The Macmillan Company.

Sombart, W. (1992) Cahiers d’histoire de la comptabilit?e, Editions Ordre des experts comptableset Editions comptables Malesherbes, vol. 2

Weber, M. (1991) Histoire ?economique. Esquisse d’une histoire universelle de l’?economie et de la soci?et?e. Paris: Gallimard

Wilson, J. F (1995) British business history, 1720-1994. Manchester and New York: Manchester University Press.

Yamey, BS. (1964) ‘Accounting and the rise of capitalism: further notes of a theme by Sombart’ Journal of Accounting Research 2(2):117–36

Young, J. J. (2006) ‘Make up users’ Accounting, Organizations and Society 31 (6): 579-600

Free Essays

How the accounting function should support their organisation in adopting and implementing a strategic approach to sustainability.


Our planet is constantly changing and most of the changes that are occurring are as a result of our actions. The use of limited resources by different types of organisations all over the world to create products and services without much thought of what happens in the long run. Some important questions that need answers to are; will resources run out if not properly managedWill there be resources for future generationsHow can the limited resources be managed to ensure environmental catastrophes do not happenAnd how to make organisations

more accountable by involving accountants in the sustainability process Our environment may become severely affected if strategic discussions, objectives, goals and targets are not fully integrated within governance, accountability arrangements, reporting and the organisation’s way of governing overall risk management. Since sustainability is one of the key drivers for business in current years,the accountants should be able to support their organisation in adopting and implementing a strategic approach to sustainability.

Accounting Function

Accounting is defined by the American Institute of Certified accountants (AICPA) as ‘the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof’. An Accountant’s main purpose up until the 90’s was reporting financial accounts in terms of monetary values and profits however, the accounting profession needs to embrace the issue of sustainability to be able to maintain its integrity as a profession. Accountants should consider achieving wider transparency with non-financial Reporting against a broader set of stakeholder expectations. Such as separate, sustainability or corporate social responsibility reports that may be based on de facto standards, such as those from the Global Reporting Initiative. This perspective also includes sustainability assurance, to help to improve credibility and trust, and might be of interest to those professional accountants in public practice.

Retail Sustainability, UK

Sustainability has three important dimensions for all organisations including the retail sector;

Economic viability
Social responsibility
Environmental responsibility.

The challenges of sustainable development require innovative approaches that inspire, and call businesses, governments and people to action. The retail sector can make a huge contribution to sustainability through their own operations, through their supply chains and through their relationships with their customers.

The recognition governments and many organisations have given in to sustainability and sustainable developments are changing business culture and society. The global challenge is to ensure that retail organisations embrace sustainable development practices; Reverse the previous erosion of natural resources; Improve their environmental, social, and economic performance. This requires radical changes in the way we do business and the way we live our lives.

M & S Sustainability Approach

Marks and Spencer claim to become the most sustainable retailer in the world. Retail organisation like marks & Spencer have already let the public know some of the goals of the company which will help them to achieve sustainability. M&S engaging customer with Plan A, the aim of this plan A is to encourages shoppers to give ideas for environmental change. Through suggestions from shoppers they have been able to introduce the ‘charging for plastic bags scheme’ and this has significantly reduced the use of plastic bags at their stores by more than 70%.

Marks and Spencer is in partnerships with WWF which help them to address environmental issues associated with sourcing cotton, wood and fish and they are helping them to fund vital orang-utan conservation in the Heart of Borneo; Oxfam helped them to encourage clothing recycling whilst also raising money for their vital work. They have also worked with a range of partners for over three years to run their Marks & Start work experience programme for disadvantaged group which has helped over 800 people get back into work in the UK.

‘’Producing and harvesting raw materials can cause significant harm to the environment. Becoming more sustainable means making better use of the materials already available to us and at the same time making sure that key raw materials are sourced in ways that allow them to be naturally replenished’’

Sustainability Management

Sustainability Management will help Accountants to Introduce sustainability measures, and environmental accounting as an extension of existing Accounting/information systems to accommodate organisational plans for sustainable development and enhancing performance evaluation and measurement. Accountants can advice on how organisations can relatively improve energy efficiency and reduce waste; this, in turn, can help them improve environmental performance while reducing their costs, all in a relatively short time frame. M&S claims it saved ?50m in 2009-10 as a result of Plan A, which was launched in 2007 and Between April 2007 and May 2008, they managed to save 12%, or 1402 tonnes of packaging.

Accountants should consider achieving wider transparency with non-financial Reporting against a broader set of stakeholder expectations. Such as separate sustainability or corporate social responsibility reports that may be based on de facto standards, such as those from the Global Reporting Initiative. Included is advice on reporting on climate change issues and emissions in a way that demonstrates the existence of a structured system and approach to managing climate change impact and risks

Government Policy on Sustainability

National strategy
The UK and devolved governments have separate strategies, each including further priorities and supported by further measures and indicators, based on their different responsibilities, needs and views.
Our estate The Government is committed to leading by example on sustainable operations and procurement. Sustainable Operations of the Government Estate sets targets for all Government departments, agencies and bodies.
Local and regional
Local and regional solutions are needed to address locally identified problems. Sustainable communities, in both urban and rural areas, can stimulate the delivery of sustainable development.
The UK actively promotes multilateral and sustainable solutions to today’s most pressing environmental, economic and social problems. More prosperous nations have an obligation to put their own house in order, and to support other countries in the transition towards a more equitable and sustainable world.

“There are a couple of thousand accountants in Johnson & Johnson and not many of them are even familiar with the term “sustainability”

Michael J. Foley, Assistant Corporate Controller, Johnson & Johnson, USA

Creating Sustainable Value

The new Sustainability Framework, developed by the Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC), highlights the issues that organisations must address to make sustainability part of their business model. It offers guidance on how to inject sustainability leadership into the management cycle, from making and executing strategic decisions to reporting on performance to stakeholders. Framework allows professional accountants to easily navigate those sustainability issues that are most important to their immediate roles.

How Effective are Sustainability measures?

Evaluating whether sustainability is only there in theory and not in practice is difficult. Most retail organisations claim to have the right and practicable sustainability measure in place because they have incorporated corporate social responsibility into their main business objective but there are reasons that suggest they in fact portray themselves as socially responsible when this might not be the case in reality.

The initiative by retail organisations to encourage customers to use less plastic bags have not worked on all customers as people tend to forget them and buy new ones each time they go shopping. Nevertheless, more retailers are conscious of their impact on people and the planet, and some are becoming sustainability leaders. But is this concern genuine or simply crass marketing, or even “greenwashing?”


Enhancing the role of professional accountants in developing sustainable business can benefit retail employers and the public. Accountants’ professional background and orientation has equipped them with the necessary qualities to support their contribution – namely, wide business understanding, numeracy and knowledge of measurement, and objectivity and integrity. Applying these skills to sustainability issues can help organisations to embrace sustainable development, and to incorporate it into strategic planning, execution and reporting.


Can’t see the wood for trees, Can’t see the trees for the numbersAccounting education, Sustainability and the Public Interest. ROB GRAY* AND DAVID COLLISON†

The plan A [Accessed 20th January 2011]

Marks & Spencer sustainability pledge is flawed [Accessed 9th February]

Marks & Spencer sets out its sustainable stall [Accessed 11th February]–spencer-sets-out-its-sustainable-stall-1914358.htm

Free Essays

Advantages and Disadvantages of Accounting information systems (AIS)


Accounting information systems (AIS) have experienced vast changes in several decades, improving from paper-based journals and ledgers to completely automated, paperless systems. However, the migration from paper to computer has its risks to the company.

It contains the confidential information which becomes compromised if it is unprotected. The unauthorized use of the accounting system can be misused and involved in risking loss of the information, disastrous and bad data input. Security of accounting systems is a priority in many companies. In recent decades, the changing environment has posed a threat to the company. As a system accountant of a large established UK based Retail Company specialising in the sale of household electrical appliances, it is necessary to consider the risks and the security threats that the company would face in today’s business environment.

According to Tony Boczko, risk is related to the likelihood of loss, the probability of mischance and the possibility of hazard or harm. Moreover, risk can be defined in several ways such as the chance of bad consequences, the exposure to mischance and the probability of loss. These risks and threats can lead an undesirable impact on both the present and future of the company’s financial activities and stability.

Type and nature of both the risks and the security threats

Nature of risk

The nature and source of the risks can be distinguished into two primary sources of risk which can be categorized as the event/activity-based risk and resource/asset-based risk. By referring to Tony Boczko 2007 (pp. 681), he mentioned that event/activity-based risk is defined as the risk which is associated with the particular event/ activity or the group of activities/ events. The resource/ asset- based risk is the subsidiary primary source which can be defined as the risk which is associated with the possession and use of the resource/ asset or the group of recources/ assets.

In addition, Tony Boczko 2007(pp. 681) mentioned that the source of risk can be categorized into four associated secondary sources of risks such as authorized internal employee and external agent-based risk, unauthorized persons-based risk and nature-based risk. The case of the authorized internal employee/ external agent-based risk is the possible loss which can be resulted from the unintentional or deliberate errors. Unauthorized persons-based risk is most likely involved in the risk of possible loss which can be resulted in the possible breaches of security and misappropriation of assets and information. The nature based risk is involved in the risk of possible loss which is resulted from the geographical disaster or meteorological conditions.

Type of Risk

What are the different types of risksThere a number of differing types of risk that can affect the household electrical appliances company in today’s business environment. One of the risks is unintentional error. Unintentional error is the error which is related to the inadvertent mistake and erroneous actions attributable to the bad judgement in decision making, ignorance and inattention. The unintentional errors that happened through computerized systems are always at of risk power failure of the computer, viruses attack and end up with losing the important information of the company such as financial documents. Furthermore, problems with computerized system could lead to a standstill in usage of the database. When the household electrical appliances company is focus and reliant on the accounting information system, the unintentional error due to the power and computer outage could lead to a work disruption. Work disruption can disable the input of the information of the company can access to the stored information. Additionally, if the data is not backed up properly, the company will end up lost its important data.

Risk such as deliberate errors can cause the company with the bad and serious implications. According to Tony Boczko 2007(pp. 682), deliberate errors can be explained as the conscious erroneousness and incorrectness whose occurrences are designed to damage, destroy and defraud a person, group of persons and organization. Such errors are intentional and premeditated. What if there is ‘someone’ else hosting its precious and valuable data‘Someone’ refers to the hacker. Hacking is the illegal action which involved in gaining unauthorized access to the company accounting information system to steal and get the data illegally. The big news of the hacking system is NASA’s system. ‘In 2002, Gary McKinnon was arrested by the UK’s national high-tech crime unit, after being accused of hacking into NASA and the US military computer networks.’ (BBC NEWS, 2006) Besides that, the hacker ‘The hacker has also denied that he had made Washington’s computer system inoperable, although he did admit he may have deleted some government files by accidentally pressing the wrong key’. (Jo Best, 2005). Deliberate errors brought a serious implication to the company.

Besides that, natural disaster is also counted as the serious type of risk in today’s business environment. ‘A natural disaster is the effect of a natural hazard (e.g., flood, tornado, hurricane, volcanic eruption, earthquake, or landslide). It leads to financial, environmental or human losses. The resulting loss depends on the vulnerability of the affected population to resist the hazard, also called their resilience’. (Wikipedia, 2011) As a household electrical appliances company, if it is suffered from the natural disaster such as floods. Floods can destroy drainage computer system and cause the raw sewage to spill with water. Besides that, building and company’s equipments can be also damaged due to the floods. It will lead to the catastrophic effects on the environment as the toxic such as gasoline will be released and caused pollution. Floods can cause a huge amount of money losses to the business.

Type of Security Threats

In today’s business environment, there are many computer frauds and computer crimes through computerized accounting information systems. Fraud can be defined as ‘deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage. In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual’. (Wikipedia, 2011) As a household electrical appliances company, the internal employees or managers as well as the shareholders can be also fraud through the computerized accounting information system. The information stored electronically can be manipulated and accessed if proper controls and security measures are not taken place. This will affect the operation of the business. Fraud such as account takeover is a serious activity which always happens in today’s business environment. ‘An account takeover can happen when a fraudster poses as a genuine customer, gains control of an account and then makes unauthorized transactions’. (Action fraud) The information of account holders such as credit card can be taken over by those fraudsters.

Los Angeles attorney Christopher Painter said: “If you have an explosive growth on the Internet, you’re going to have this great huge growth in fraudulent conduct and crime committed over the internet.” (BBC NEWS, 1999) From this evidence, we can see that there is a security threat on today’s business through the computerized accounting information system. Fraudster can be sued if they found out by people. For example, ‘Bank of America and two of its former bosses have been charged with fraud for allegedly misleading shareholders during the takeover of Merrill Lynch’. (, 2010)

There are few types of fraud, such as false billing, financial fraud, advanced fee frauds, identity theft and phishing. In false billing scam, the fraudster will send out a so-called invoice for a particular product or service that are never be ordered, fraudster hope that it will be paid for sure from the victim without any investigation. This activity usually happened in large business organization, it is because large business organization has a billing or payments system which used to pay the invoice of the company, fraudster sends out those fake invoices and hope that this will be unnoticed by the large business organizations.

‘Phishing is a way of attempting to acquire sensitive information such as usernames, passwords and credit card details by masquerading as a trustworthy entity in an electronic communication’. (Wikipedia, 2011) It is dangerous for today’s business operation, it is because instead of stealing the personal and business information, ‘phishers’ can affect the computer with the viruses and convince the victim in order to participate in money laundering.

Another security threat is computer crime, according to Tony Boczko 2007 (pp. 691), he mentioned that computer crime can be defined as the deliberate action to gain access to, or steal, damage or destroy the computer data without authorization. Computer crime involves in the activity of dishonest manipulation of computer programs or computer-based data. It also involves in the fraudulent use/abuse of computer access and resources for personal gain.

The types of computer crime such as the inappropriate use of corporate information systems, theft of computer and hardware, unauthorized access and information theft or the fraudulent modification of data and programs, system failure and premeditated virus infection and disruptive software. It is hard to define a computer crime; it is because computer crime is always and easily be happened in the business organization. People might think that fraud is also kind of computer crime. It is a wide context in security threats.

As a household electrical appliances company, premeditated virus infection such as spyware, it gathers the users and client’s information and relays it to the third party such as advertisers. Spyware can monitor operation of the computer, scan the important information and files, snoop on the private applications such as chat programs. By reading the cookies and change the default web browser, spyware can consistently relaying the information from the database. It is dangerous for the business organization, because if their competitors spy into their programs and get the costs and type of materials of the electrical appliances as well as the client’s contact number, the business organization will be easily defeated by competitors.

There is a latest issue about the Sony PlayStation Network which involved in the identity theft. ‘Up to 3 million Britons are believed to be among the 77 million users of Sony’s PlayStation Network, which has been hacked into by criminals who have stolen users’ personal information, possibly including credit card details’. (Charles Arthur and Keith Stuart, 2011)

‘Sony, which shut down the online games, movies and music delivery system last week after it was attacked by hackers, has said that although names, birthdates, e-mail addresses and log-in information were compromised for certain players, it has seen “no evidence that credit data was taken,” but “cannot rule out the possibility’. (Richard Newman, 2011)

Security Strategies/Measures

Due to the vulnerability of the computerized accounting information system, it is easy to be attacked by internal and external people of the business organization. It is necessary to implement some methods to solve the serious issues. According to American Institute of CPAs In order to protect the business organization from the attack of risk and security threats, , TOP Technology Initiatives Task Force, which is a group of the technologically astute members of the CPA profession and other technology professionals, collaborated in the AICPA’s Top Technology Initiatives project, seeking to identify the most important technology initiatives.

The first method is enhancing the information security such as upgrade the hardware and software in order to protect the information systems from the security threats. Company should implement and upgrade the level of firewall which blocks the intrusion from the internet. Update the anti-virus programs with the logins of password and username to limit access. Besides that, company should hire the experienced network integrator to check whether it is work properly with the security patches. Additionally, company can have a security audit for the independent confirmation on the company’s financial data and client’s information. Through this process, business organization can be protected.

The other method is disaster and business continuity planning. It is an activity which involves in the developing, monitoring and updating of the climate change, accident and other malicious destruction. It can prevent the business organization to loss their important information. It is because having the computerized accounting information system down for few hours or few days due to the natural disaster; could lead a bad impact to the profitability and liquidity of the business organization. So, business organization should plan and design a process to keep the system stable to prevent any losses.

Control Procedure

According to Tony Boczko 2007(pp. 729), he mentioned that the internal control which comprises the processes or procedures within a business organization designed to provide a reasonable assurance that business objective- primarily the maximization of shareholder wealth which can be achieved and those undesired events can be prevented or corrected.

The internal control related to the management control. It can be defined as a diverse range of activities designed to conduct, direct and control business activities and ensure the consistency with corporate business objective. For example auditors, their role is to audit the business organization’s internal control policies, to assure that the control within the departments is under controls and adequate, it can help in control the financial statement to prevent the financial loss in order to achieve the mission of business organization.

Furthermore, internal control such as risk assessment is also needed to be taken place in every business organization. It is an effective control procedure helps in protecting company.

According to health and safety executive, the risk assessment, instead of creating the huge amounts of paperwork, but rather about identifying sensible measures to control the risks in the business organization. Risk assessment is help to protect people by putting in place measures to control those risks. As a household of electrical appliances company, risk assessment is a good starting point; manager can actually investigate and look for the hazard which may cause harm to the business organization. Furthermore, a critical thinking about how the accident could happen and who will be influenced could help in noticing and monitoring the risk. Once the managers identify the risk, it will be easily to control and put a suitable measure on it.


As a conclusion, accounting information system brings a lot of disadvantages to the organization in today’s business environment, but accounting information system combines the study and practice of the accounting with the concept of designing, implementing, controlling and monitoring the information systems. It also combines the modern information technology and the traditional accounting system to provide a better financial system to manage and improve the financial performance of the organization.

Free Essays

Analysis of Activity Based Accounting


Activity-Based Costing (ABC), a tool for cost management, has recently gained popularity, is based on a simple idea: in an enterprise, overhead (or operating expenses) are measured by a number of activities needed to successfully perform manufacturing and business processes. The total cost of a product is the sum of the costs of activities that are the real cause of the overhead include establishing vendor relations, purchasing, receiving, setting up a machine, running the machine, disbursing, reorganizing the production flow, redesigning the product, and taking a customer order (Turney, 1989). By design, ABC provides not only relatively accurate cost data, but also information about the origin of the cost (Cooper and Kaplan, 1988).In ABC, the manufacturing overhead are assigned to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. It permits the very important distinction between resource usage and resource spending (Cooper and Kaplan, 1992).

Traditional cost models apply resources to products in two ways. So called direct costs like material and direct labour are attributed directly to the product and other resources are arbitrarily allocated to the product, typically through the mechanism of direct labour hours, labour dollars or machine hours. Sales, marketing and administrative costs are not included in product costs. But, Activity Based Costing (ABC) does not change the way material and direct labour are attributed to manufactured products with the exception that direct labour loses its special place as a surrogate application method for overhead resources. Direct labour is considered another cost pool to be assigned to processes and products in a meaningful manner, no different than any other resource.

The primary task of activity based costing is to break out indirect activities into meaningful pools which can then be assigned to processes in a manner which better reflects the way costs are actually incurred. The system must recognize that resources are consumed by processes or products in different proportions for each activity

Activity Based Costing Advantages

• More accurate costing of products/services, customers and distribution channels.

• Better understanding overhead for everyone.

• Utilizes unit cost rather than just total cost.

• Integrates well with Six Sigma and other continuous improvement programs.

• Makes visible waste and non-value added.

• Supports performance management and scorecards.

• Enables costing of processes, supply chains and value streams.

• Here mirrors way work is done.

• Support facilitates benchmarking.

• One of benefit of ABC is, it enhance the strategic decision making for managers in a company .They can bring new information that they haven’t noticed before so they can take better decision about cost.

• Help the manager to understand where there are lot more cost and prod it breaks action as we can see in power drip packing in labour and maintenances.

Advantages of switching to machine hours as an overhead recovery base:

1. With machine hour rate, the Cylinder manufacturing company (CMC) can accuse almost all operating expenses on the basis of machines.

2. With the help of under absorption of machine overhead, CMC can find the idle time of machine. Then, can try to reduce it.

3. It is useful to increase efficiency of machine, because CMC can use it effective way and all overheads depends on it.

4. It is a scientific method to calculate factory overhead cost.

5. By this, CMC can firstly calculate total production cost, after this, it is very easy to calculate selling price of any product.

6. If we absorbed overheads on the basis of machine hours, CMC can get more meaningful and accurate product cost compared to labour hours.

If we look at the Cylinder manufacturing company case study, then we will find the following overheads based on machine hours and labour hours.

For overheads based on labour hours

The Budgeted labour rate = ?149.825 per dlh

Total overheads for Standard products = ?149.825 per dlh x 2,500 dlh = ?374,562.5

Total overheads for Specialised products = ?149.825 per dlh x 1,500 dlh = ?224,737.5

Overheads based on machine hours

Total machine hours=6500.

Total overheads to be distributed=?599,300

Budgeted overhead burden/machine hour=599300/6500 =?92.2 pounds.

Total Overhead burden for standard products=92.2*3500=?322,700.

Total Overhead burden for specialized products=92.2*3000=?276,600.

If Cylinder manufacturing company uses machine hours for overhead calculation instead of labour hours, then the output will be more accurate. It is quite easy to find the machine hours correctly than labour hours. As the machine is in automated system, from a machine they can find the correct information about the total machine hours used by a product. Moreover the efficiency of all machines are all most same but it’s vary a lot for labours, because all human beings efficiency is not same.

In the case of labour hour the difference between overheads for standard product and specialised product is high. But for machine hours it is relatively low. But we know, specialised product needs more machine hours than the standard products. Therefore, the gap should be low. So, we can say absorbed overheads on the basis of machine hours give more accurate output than absorbed overheads on labour hours. Then the manager can know the cost of sell more accurately and select correct pricing for the product and maximizing the profit.

Comparison among three accounting methods:

Here, I will be working through the provided data three times. Firstly, I will show how traditional cost accounting methods might deal with them; secondly to look at the multiple volume based overhead method; and, finally, I will illustrate the ABC method using all of the data in great detail.

Traditional allocation method (direct labour hours basis):

The direct labour hour rate is

total overheads

total number of labour hours



?149.825 per dlh

The overheads recovered are:

Direct labour hour rate x number of direct labour hours per product

For Standard products, the calculation is: ?149.825 per dlh x 2,500 dlh = ?374,562.5

For Specialised products, the calculation is: ?149.825 per dlh x 1,500 dlh = ?224,737.5

Multiple volume based allocation method:

This method has an advance on the traditional allocation method in that it does make some allowance for activities to influence the absorption of overheads. In the case of Cylinder manufacturing company, two absorption rates to apply here: the receiving department overhead rate, and the “other” overhead rate

The reasoning here is that, the organisation I am simulating is using a two rate basis of apportioning overheads: firstly, a material handling overhead rate is used to assign overhead to a separate cost centre on the basis of the number of number of stores orders; secondly all of the other overheads are assigned using a general machine hour rate on the basis that the number of machine hours far exceeds the number of labour hours.

The Materials handling overhead rate is

Total Materials handling overheads

Total number of stores orders



?260 per stores orders

For Standard products,

?260 per stores orders x 160 stores orders = ?41,600

For Specialised products,

?260 per stores orders x 300 stores orders = ?78,000

The other overhead rate, calculated by dividing the total other overheads by the number of machine hours applied, is:

?599,300 – ?119,600

6,500 machine hours


6,500 machine hours

?73.8 per machine hours

For Standard products other overheads cost is,

?73.8 per machine hours x 3500 machine hours = ?258,300

For Specialised products other overheads cost is,

?73.8 per machine hours x 3000 machine hours = ?221,400


Total overhead burden for standard product= ?299,900

Total overhead burden for standard product= ?299,400

ABC Method:

To apply the ABC method, we need to identify cost drivers for two stages:

1 cost drivers tracing the costs of inputs into cost pools; and

2 cost drivers tracing the cost pools into product costs

The workings that follow illustrate clearly how such cost drivers work through the ABC system in these two stages: an initial overhead amount being further subdivided into two parts according the needs of the situation.

Cost of machines driven by machine hours

Standard product = 3,500/6,500*279,500=?150,500

Specialized 3,000/6,500*279,500=?129,000.

Set up and engineering support cost driven by number of set ups.

Standard product = 80/280*200,200=?57,200

Specialized product = 200/280*200,200=?143,000

Material handling cost driven by number of stores orders

Standard product = 160/460*119,600=?41,600

Specialized product = 300/460*119,600=?78,000

Total overhead burden for standard product = ?249,300

Total overhead burden for specialized product = ?350,000

Total overheads for standard and specialised product in three accounting methods are shown in the following table


Specialised product




Multi Volume






From the above comparisons, it is cleared that multiple volume based allocation method gives more accurate data than daily labour hour method. But activity based costing system is the best as it gives more meaningful data than others, therefore Cylinder manufacturing company should try it for their cost reduction.

How Cylinder manufacturing company can implement activity based costing system:

As we know ABC is little bit heard to implement and more time consuming, because so much informative can be required about lots of items. And there is a cost of buying, implementing and maintaining activity based system.

According to me, in order to implementation Cylinder manufacturing company require a lot of preparation, because as it mention before there are a lot activities and information that needs to be gathered .So before going to implement ABC, Cylinder manufacturing company must be prepared it self by gathering lot of information for understand what exactly they are going to doing. During the setup time of activity based costing, they can temporally use old marginal and absorption account method. Management focus need to be changed on not just the performance but the activities that going into that performance need to be paradise here, the organization should not just focus on one area, the overall view of the company. It has to change the manager view of the company here managers are not just looking at the cost there are going go back to the activities, needs to change their attitude towards those cost activities.

Overall, if the company implemented it properly they understood what they doing with ABC methods and they can see the benefit of the actually using this.


Cooper, R. (1988) “The Rise of Activity-Based Costing – Part One: What is an Activity-Based Cost System?” Journal of Cost Management (Summer), pp. 45-54.

Cooper, R. (1988) “The Rise of Activity-Based Costing – Part Two: When Do I Need an Activity-Based Cost System?” Journal of Cost Management (Fall), pp. 41-58

Gunasekaran, A. and Singh, D. (1999) “Design of activity-based costing in a small company: a case study” Computers & Industrial Engineering 37, pp. 413–416

Kaplan, R. S. (1988). “One Cost System Isn’t Enough,” Harvard Business Review, January-February, pp. 61-66.

Kelline S. C., Downet, R. G. and Smitt L.G. (2001) “Activity-based costing and higher education: Can it work?” Available at: [Accessed on May 15, 2011]

Williamson, D. (1996) “Cost and Management Accounting” Prentice Hall. Available at: [Accessed on May 15, 2011]

Oulu University Library (2000) “Implementation of design to profit in a complex and dynamic business context:Chapter 2. Life cycle analysis and product costing”. Available at: [Accessed on May 16, 2011] (2010) “Activity Based Costing Example Part 1 to 8” You Tube. Available at: [Accessed on May 17, 2011]


Cooper, R. and Kaplan, R. S. (1988) “Measure Costs Right: Make the Right Decisions” Harvard Business Review, September/October, pp. 96-102.

Turney, P. B. B. (1989). “Activity-Based Costing: A Tool for Manufacturing Excellence” Target, summer, pp. 13-19.

Cooper, R. and Kaplan, R. S. (1992). “Activity-Based Systems: Measuring the Costs of Resource Usage ” Accounting Horizons, September, pp. 1-13.

Free Essays

The Value of Accounting Disclosure in UK Capital Market


This study is focused on identifying the value of accounting disclosure in the UK capital market, citing the relationship between market capitalisation and money raised of 50 selected LSE-listed companies. The data of these companies are obtained from the database of the London Stock Exchange website. Non-probability sampling is adopted in selecting these companies from a list of 350. Linear regression is adopted to present the results. A significant relationship is observed between market capitalisation and money raised. The value of accounting disclosure in the UK capital market are reduction of cost of capital and information asymmetry; consistency of firms’ accounting policies; enhancement of management reputation; capability to address the information needs of stakeholders; and mitigate inefficiencies within the market.

The recommendations include pursuing a study on the impact of financial globalisation on financial reporting and on the role of audit committee in corporate governance.

Key words: Accounting disclosure, financial globalisation, market capitalisation, money raised, UK capital market

Chapter 1: Introduction

1.1 Context

Capital markets operate in a highly regulated environment; they are well-developed and well-functioning compared to other markets (Kieff and Paredes, 2010). Pohl et al. (1995) defined capital markets as those markets for shares (equities) of joint-stock firms and do not engage with markets for other securities, such as bonds, etc. More regulations exist in this market than product and other markets, a fact that is attributed to the historical origin of securities regulation, whereby public investors must be protected against deceptive misleading and manipulative activities by brokers and other personages. Mandatory disclosure and anti-fraud laws are two fundamental ways in which investors are protected in capital markets (OECD, 2001; Kieff and Paredes, 2010; Moore, 2013). In the UK, the London Stock Exchange which serves as its capital market, is valued at ˆ2,307 billion (House of Commons Treasury Committee, 2007).

OECD (2001) described the well-recognised value of disclosure and the well-analysed relationship between the efficiency of the stock market and the available information in the market place. According to Shehata (2014), disclosure is defined in the accounting literature as a process where the firm informs the public of its financial statement. It is also referred to as the financial or nonfinancial communication of economic information, quantitative or qualitative, about a firm’s financial position and performance. It is however not entirely clear why the law needs to require disclosure of certain information by a firm (Kieff and Paredes, 2010). There are in fact countries which hold a register system of merchants that present particular information about the amount of capital, names of directors and officers, etc. of business entities. In many jurisdictions, a detailed disclosure system has been provided by securities law for large public firms (Kieff and Paredes, 2010). Notwithstanding, the value of information being disclosed is the basis of the value of disclosure (Flood, 2014). Accounting and non-accounting types of information are the two kinds of information being disclosed, with this research investigation being centered on the first. The basis of useful accounting information is appropriate accounting treatment (Nikolai et al., 2010; Kieff and Paredes, 2010). Both benefits and costs are involved in mandatory disclosure, with its values being reliant on other elements of corporate governance. Additionally, more available information in the market place enables capital markets to function better, which in turn makes disclosure become more valuable in the capital market-centred environment (OECD, 2001).

The UK capital market, through the London stock market or its bond market, demands that firms disclose information under the guidance of accounting and auditing standards. The authority to set accounting standards has been delegated to the Financial Accounting Standards Board (FASB) in 1974 (Benston et al., 2006). A legal framework facilitates general accounting disclosure and audit requirements in the country. Before the conception of formal standard setting and upon the corresponding increase in public interest, financial reporting standards have been adopted by stock markets (which companies accepted for listing must follow), serving as evidence that markets can and will demand disclosure even in the absence of government directives to do so (Benston et al., 2006). It has been noted that publicly owned companies present their annual reports that include those items described above by Flesher (2010). The domain of financial reporting disclosure is constantly changing.

An important point is that the transparency in information on asset securitisation and derivatives is insufficient; necessitating increased disaggregated information and disclosure vis-a-vis the sensitivity of the fair values of change derivatives in risk variables within a specific market (Eberhartinger and Lee, 2014). Eberhartinger and Lee claimed that disclosure enhancement on fair value accounting would provide improved assistance to investors in terms of assessing the values and level of risk of banks through a clear understanding of the leverage of derivatives.

On the other hand, there are inevitable weaknesses that a firm encounters in mandated disclosure, such as a requirement to public companies to undertake periodic public disclosures, which is the most typical. Most jurisdictions require quarterly disclosure; with the law delineating the scope of information being disclosed. Accounting and financial data comprise the scope of information being disclosed (Kieff and Paredes, 2010).

Leuz and Wysocki (2006) noted that according to research, strict regulations are costly for firms, and these result in avoidance strategies, i.e. going private, having listed in other global markets, and having delisted into unregulated markets. Additionally, the globalisation of capital markets has posted limitations to what a regulator can do. It has been noted that accounting disclosure and auditing rules ascertain the amount of information asymmetries between corporate insiders and outsiders (Dietl, 1998). These rules discourage ownership concentration, facilitate corporate governance, boost risk diversification, and encourage a huge number of investors to participate in capital market operations. On the contrary, weak accounting disclosure regulations enhance the costs of outside corporate governance; lead to the promotion of ownership concentration; and discourage investors from participating in capital market operations (Dietl, 1998).

Capital markets are designed for long-term securities trading (e.g. shares and bonds), which draw together long-term capital suppliers and demanders. In the UK, the London Stock Exchange (LSE) – which serves as the principal capital market – and the Alternative Investment Market (AIM) comprise the capital market. The LSE offers UK and foreign companies the mechanism for raising capital, government securities, Eurobonds, and so on (McMenamin, 2005).

1.2 Rationale of the Study

The rational of the study is found in the fact that communicating firm performance and governance to outside investors necessitates the potential importance of financial disclosure and reporting (Healy and Pelepu, 2001). Efficient resource allocation in a capital market economy is hampered by information and incentive quandaries. These quandaries are mitigated through the important role played by disclosure and institutions tasked to facilitate reliable disclosure between managers and investors. The functioning of the capital market can encounter breakdown if there are information problems arising from information differences and conflicting incentives (Healy and Pelepu, 2001).

1.3 Research Gaps

There is lack of research explaining why the law requires the disclosure of certain information by a firm (OECD, 2001; Kieff and Paredes, 2010). There are also important gaps between knowledge on auditors’ incentives and intermediaries, and its implication on their credibility. Moreover, whilst it has been suggested by theory that auditors increase the credibility of financial reports, empirical research demonstrated only little research to substantiate this claim (Healy and Pelepu, 2001).

1.4 Scope of the Study

The scope of this study is limited to London Stock Exchange as a capital market in the UK and excludes other stock exchanges. It is also solely focused on the discussion of capital markets for accounting disclosure and does not include other markets, such as the product market.

1.5 Research Question

The research question that this study purports to answer is:

What is the value of accounting disclosure in UK capital market, citing the relationship between market capitalisation and money raised of companies trading in this market?

1.6 Aims and Objectives

The aims of this study are to discuss the value of accounting disclosure in the UK capital market and to explore the impact of globalisation on the ways in which accounting disclosure in this market is carried out.

The objectives are as follows:

To survey the extant literature on accounting disclosure in UK capital market;
To conduct an enquiry on the role of financial globalisation in accounting disclosure in the changing capital market in the UK; and
To examine how accounting disclosure could influence the pattern of market capitalisation and money raised in the UK capital market.

1.7 Significance of the Study

This study is significant to the academic community as it enables exploring and explaining why accounting disclosure is important to capital markets and corporate governance as a whole, serving as a contribution to the existing literature research on the subject. It provides relevance to the business community in its discussion of the role of globalisation in capital market transactions and accounting disclosure in this market. In addition, it is significant to the future researcher as it serves as research evidence and reference to similar research endeavor being carried out.

1.8 Ways to Investigate the Research Questions

The ways through which the research questions are investigated are delineated in the items below:

Research Method

Linear regression is carried out to process the data statistically, indicating the use of quantitative method as a way to analyse the data. Olagbemi (2011) stated that quantitative research employs statistical techniques in explaining a certain phenomenon, and likewise presents results statistically. The relevance of adopting the quantitative method is the study’s intention to find out the relationship between market capitalisation and money raised in its attempt to identify the value of accounting disclosure in UK capital market.

Data Collection and Analysis Techniques

Secondary data collection is carried out in this research, in which the researcher utilises non-original or second-hand data collected by another for a specific purpose, which he uses again for his own (Churchill and Iacobucci, 2010). This study does not make use of primary data, such as interviews, surveys, focus groups, etc. and as such relies solely on existing literature on accounting disclosure in capital markets. Since only secondary data are collected, this study thus adopts a desk-based approach.

The analysis technique is based on using high-quality secondary data from accounting disclosure enquiry, using the literature review as basis of evidence.

1.9 Summary

This chapter provides a discussion of the context of accounting disclosure in the UK capital market; the rationale of the study; research gap; scope; research question; aims and objectives; and ways to investigate the research questions covering the research method, data collection, and analysis technique to be conducted. It described that capital markets function in a highly regulated environment and necessitate the value of disclosure system. The potential value of financial disclosure and reporting is necessary in communicating firm performance and governance to outside investors.

Chapter 2: Literature Review

2.1 Introduction

This chapter aims to provide a discussion of a range of works and studies from the extant literature on the topic being examined. The purpose is to offer evidence that could help in addressing the research question and objectives. According to Oliver (2012), a literature review is not simply a descriptive inventory or a collection of synopses of related information. Rather, its main objective is to determine what has been known and unknown about a specific aspect of practice that has not been entirely resolved and to identify how this might be resolved and managed according to the evidence presented by research.

2.2 Accounting Disclosure in Capital Market

Numerous studies have been emphasised on the relationship between accounting information and capital markets. In their article, Dumontier and Raffournier (2002) examined the corresponding evidence of this relationship in Europe and thereby conducted a review classifying the European literature into three groups: Those researches tackling market reaction to recently released accounting information; researches focusing on investors’ use of accounting data; and researches that delve on the impact of market pressure on accounting decisions. This discussion is important in looking into the relationship between accounting information and capital markets.

According to Healy and Palepu (2001), corporate disclosure is an important element in the functioning of an efficient capital market. Regulated financial reports serves as the source of firms in providing disclosure, and such reports include financial statements; management discussions and analysis; and the like. The authors conducted a review of financial reporting and management’s voluntary disclosure of information, and thereby argued that demand for financial disclosure and reporting emerges out of information asymmetry and agency conflicts between the management and outside investors. Regulators, auditors, and other intermediaries of capital market enhance the credibility of management disclosures. They cited that new information is generated through financial analysts’ earnings forecasts and stock recommendations. They also stated that the contracting perspective research shows compensation, political cost considerations, and lending contracts, influencing accounting decisions. On the other hand, capital market research shows the relatedness of voluntary disclosure decisions and capital market transactions. Evidence also suggests that investors’ perspectives of voluntary disclosures (e.g. management forecasts) are taken as credible information.

Further, Healy and Palepu (2001) used the positive accounting theory as an area of focus of research on managers’ reporting decisions, on which managements’ financial reporting choices are focused. The findings indicated that the disclosure strategies of firms have implications on the speed with which information gets into prices. Findings also suggested that firms utilising accounting methods to speed up earnings are small ones and likewise have relatively high leverage. The unique contribution of the study is its development of a framework for analysing managers’ reporting and disclosure decisions in a capital market context. Its strengths include its clear explanation of the importance of financial reporting and disclosure as a valuable means to communicate firm performance and governance. No weakness was cited for the study.

On the other hand, in Botosan‘s (1997) study, the author mentioned that the financial reporting community gives importance to the impact of disclosure level on the cost of equity capital. However, there has been lack of established tenets in terms of association between disclosure level and cost of equity capital, thereby making it difficult to quantify them. The author examined such association by regressing firm-specific estimates of cost of equity capital on firm size, market beta, and self-designed measure of the level of disclosure. He used a sample of 122 manufacturing firms in the 1990 annual reports bearing the amount of voluntary disclosure. The results demonstrated association between greater disclosure and a lower cost of equity capital. Those firms that have a high analyst following revealed no evidence of an association between disclosure level measure and equity capital cost, and such lack of evidence is assumed to have been caused by the limitation of the disclosure measure to the annual report (Botosan, 1997).

Botosan’s study used historical summaries of quarterly and annual financial results as a method to conduct trend analysis. Descriptive statistics and Spearman correlation coefficients were adopted to present the results. The unique contributions of the study are its discussion of the effect of disclosure level on equity capital cost and its focus on the association between greater disclosure and lower equity capital cost.

Botosan’s (1997) study is similar to that of Kothari (2001) in such manner that both carried out an investigation of the relation between financial statements and capital markets. Kothari conducted a review of empirical research to undertake this pursuit. He claimed that the primary sources of demand for accounting research on capital market are market efficiency tests and fundamental analysis, amongst others. Evidence from research on market efficiency tests in relation to accounting information, fundamental analysis, and relevant value of financial reporting tends to be helpful in decisions for capital market investment and corporate financial disclosure. As part of the research method, Kothari (2001) summarised the extant study on the properties of management forecasts. He also reviewed a huge body of methodological capital market research focusing on positive accounting theory. The unique contribution of the research is its inclusion of advanced research in finance, economics, and econometrics. The strengths of the study is its critique of existing research, discussion of unresolved issues, historical perspectives in the accounting literature, and use of various statistical methods to measure variables (e.g. cross-sectional regressions; autocorrelation coefficient of earnings). Its weakness on the other hand, is its methodological complication due to skewed distributions of financial variables and difficulties in the estimation of the expected return rate on securities (Kothari, 2001).

Similar to the work of Kothari (2001), that of Iatridis (2006) was focused on accounting information disclosure in UK firms’ financial statements. The aim of the study was to analyse firms’ financial characteristics that give broad disclosures, as well as to provide an assessment of their (firms) motives’ financial impact, i.e. raising equity finance. The study examined the firms’ financial attributes as they disclose information on key accounting matters, such as accounting policy changes, risk exposure, and adoption of international financial reporting standards, to name some. Iatridis (2006) inferred that firms are likely to pursue disclosure of accounting information in their attempt to assure market participants of the consistency of their accounting policies with the accounting regulation and thereby address their stakeholders’ information needs. The author posited that firms fostering informative accounting disclosures tend to demonstrate leverage measures. The difference of this study from those of earlier ones already discussed is seen in it focus on stakeholders and other market participants vis-a-vis consistency of firms’ accounting policies with the accounting regulation.

Conversely, the study of Murray and colleagues (2006) took a different direction than those of Botosan (1997); Healy and Palepu (2001); and Kothari (2001). Murray and colleagues posited that capital markets are taking an increasingly powerful stride at the global level and this power is manifested in the influence of financial markets on environmental and social conditions. The authors assumed that a possible way for markets to become reeducated towards lesser unsustainable modes of behaviour is to pursue social and environmental disclosures. The study was in keeping with much research into financial reporting theory (Murray et al., 2006).

The methods thus utilised included five statistical tests to determine if a link exists between corporate disclosures and share returns. These statistical tests included Person correlation co-efficient, chi-square test, and a general linear model. The findings suggested that firms’ profitability has not been adversely affected by disclosure of sensitive accounting information. The unique contribution of Murray and colleagues’ (2006) study is its emphasis on the fact that the implementation of international financial reporting standards fosters consistency and reliability in financial reporting due to enhanced quality of the comparability of financial statements. The strengths of the study include its utilisation of a range of methods to examine the actions and attitudes of individual investors.

Taking a similar direction in their study, Watson and colleagues (2002) explored the notion of agency and signaling theories as bearing an explanation of voluntary disclosure of ratios in firms’ annual reports. The authors adopted and tested hypotheses using data gathered over five years for 313 firms in the UK. In particular, their study considered associations between ratio disclosure and firm profitability, firm efficiency, liquidity, return on investment, firm size, and industry type. The results revealed some evidence of a relationship between ratio disclosure on one hand, and firm’s performance, firm size, and industry type, on the other. The unique contribution of this study is its emphasis on the evidence of voluntary disclosure of ratios in firms’ annual reports.

In their discussion, Gray and Roberts (1997) furthered that financial reporting involves direct and indirect costs, and that explaining the choices of foreign listing involves the significant role of disclosure. Regulatory differences are narrowed through disincentives to list in some EU countries. A study involving 459 multinational corporations with foreign listings revealed that companies tend to list more on foreign stock exchanges with lower levels of financial disclosure in relation to their own. Incidentally, experts have evaluated the level of disclosure in the UK as being ranked behind the US and Canada, but ahead of France, Japan, and Germany (Gray and Roberts, 1997). To the extent that disclosure regulations are concerned, the requirements of LSE are relatively modest for foreign companies. All EU members adopt mutual recognition whereby those companies that comply with their local requirements are also considered to comply with the requirements imposed by LSE (Gray and Roberts, 1997).

2.3 Corporate Governance in Capital Market

Haque and colleagues (2008) designed a conceptual framework intended for the relationship between corporate governance on one hand, and a firm’s financial performance and access to finance – which both determine the development of capital markets – on the other. The framework created an assumption that the corporate governance of a firm is concurrently ascertained by a set of associated governance components and other firm characteristics. The authors noted that whilst a crucial role is played by the capital markets in improving the standards of corporate governance, poor firm-related corporate governance might hamper the effectiveness of this pursuit. In addition, the firm’s ability to foster financial performance and obtain access to finance can be enhanced by the quality of firm-level corporate governance, thereby leading to the development of the capital market. The basis of the framework is the use of economic approaches to corporate governance, as well as some aspects of the assumptions of stakeholder theory. The authors furthered that the capital market of a developing economy involves a kind of governance role that is being constrained by poor protection of minority shareholders and weak incentives to improve disclosure, to name two. Disclosure and auditing are in fact embodied in firm-level corporate governance, along with ownership and control structure, diversity of the board and management, and responsibility towards stakeholders (Haque et al., 2008). This has been supported by Aguilera and Jackson (2003) where the authors cited the United States as an example in terms of its facilitation of market-oriented control mechanism, in which relatively high disclosure requirements enabled liberal property rights to protect minority shareholders. Accordingly, weak information disclosure requirements and inadequate protection for minority shareholders limit the manner in which collective action challenges in corporate control could be addressed (Aguilera and Jackson, 2003).

The method employed in Haque and colleagues’ (2008) article is a survey of literature, focusing on a discussion of institutional issues of corporate governance, transparency and accountability, access to finance, firm financing, and financial performance. The theoretical approach includes the use of stakeholder theory in analysing the relationship between corporate governance and the development of capital markets. Its unique contribution is the development of a framework that is based on an assumed determination of a firm’s corporate governance by associated governance components and other firm characteristics. In the light of these, the strengths of the article is its thorough discussion of corporate governance and its link to capital market development, as well as a clear incorporation of theories into the analysis context. No weakness is perceived from the paper.

2.4 Accounting Disclosure and Market Capitalisation

In his study about the effect of the intellectual capital disclosure of Fortune 500 companies on market capitalisation, Abdolmohammadi (2005) pointed to the significant differences between the new and old economy industries in relation to partnerships and brands’ categories of intellectual capital in their adoption of disclosure. The author showed in the results that market capitalisation is significantly impacted by intellectual capital disclosure, thereby affecting how disclosure standards in annual reports are established. The unique contribution of this study is its emphasis on the association between market capitalisation and disclosure, which then assists the research topic on addressing the research questions.

According to Griining (2011), maximising market value is a way to end the attempt of reducing the cost of equity. Corporate disclosure is said to be the ultimate objective of disclosure. Linking market capitalisation and accounting information could be undertaken to analyse this effect. The study was designed to examine the relationship between disclosure in the annual reports and market liquidity. Results demonstrated that disclosure in annual reports tends to boost market liquidity through changes in investors’ expectations. The uniqueness of the study is its provision of evidence for the effect of disclosure relating to its ‘reduction effect’ on capital cost. Its strength is seen in its inclusion of return requirements of investors, direct measures for capital cost, and market value in hypothesis development, and the likewise adoption of regression models to test the hypotheses. No weakness was identified in the research.

2.5 Financial Globalisation and Accounting Disclosure in Capital Market

With the disappearance of the barriers to international investment and the likewise improvement in technology, the firm’s cost advantage for securities to trade publicly in its country of location will increasingly disappear because of financial globalisation. Securities laws continue to function as a strong determinant of issuance of securities as well as of decisions on whether they should be issued, how these securities are valued, and where they are traded. Stulz (2009) showed a demand for mechanisms that enable firms to commit to reliable disclosure since disclosure helps in reducing agency costs. The presence of financial globalisation allows national disclosure laws to have extensive effects on the welfare of a specific country, firms, and investor portfolio. The author mentioned that much of mandatory disclosure literature has been focused on evaluating whether firms have undertaken sub-optimal disclosure due to the lower benefits from disclosure at the firm level, compared to that of the level of society in general. The article did not cite specific theoretical framework in its discussion. The findings revealed that with financial globalisation, the geographical location is no longer an important factor in the trading of securities on organised capital markets. Further, the diffusion of information has been likewise sharply reduced by technological progress. This is parallel to the discussion of Webb and colleagues (2008) in which they pointed to the relevance of financial globalisation as an avenue through which firms from weak legal environments (civil law countries) can benefit from good disclosure as a result of such globalisation. The unique contribution of Stulz’s (2009) study is its focus on financial globalisation, which is likewise considered herein as its strength, along with the article’s discussion of securities laws that allow firms to commit to disclosure policies that maximise shareholder wealth (Stulz, 2009). One weakness cited for the article is the lack of theoretical framework or lack of theories that could serve as its theoretical underpinning.

Similarly, the work of Gray and colleagues (1995) was emphasised on the impact of pressures of international capital markets on the annual reports’ corporate voluntary disclosures in the multinational enterprises in the US and UK. In particular, it aimed to provide evidence on whether disclosure of more harmonised information is demonstrated by internationally listed US and UK multinational enterprises than those which are listed only on their corresponding domestic stock markets. The authors cited a range of reasons why firms may undertake voluntary information disclosure, such as the provision of information aside from what the regulation requires. Notwithstanding, in the framework of capital market pressures, the major impetus tends to be an intention to reduce the firm’s cost of capital. Through reduction of information risk, the firm may enable investors to accept a lower return rate, in which such acceptance in turn reduces the cost of capital for the firm. The unique contribution of Gray and colleagues’ (1995) article is its focus on the growing globalisation of financial markets and the current speedy increase in the number of firms acquiring listings on foreign stock exchanges.

Some companies undertake disclosure of their financial statements for parent companies and for major subsidiaries separately. There are those that adopt two or three different sets of accounting standards to produce different sets of published financial reports in a simultaneous manner. In the international sphere, disclosure is pursued in cash flows, current cost, value added, evidence of corporate social responsibility, national and international accounting standards being brought together, and the like. Related studies have tackled such questions as disclosure patterns in individual countries related to some baseline requirements, i.e. those listed under LSE (Flesher, 2010). LSE serves as the first stock market in Europe in terms of requiring disclosure of individual executive remuneration (Krivogorsky and Dick, 2011). Assessments are pursued on what active financial analysts would like to have, as opposed to what is available to them. In this chapter, Healy and Palepu (2001) reiterated that new information is generated through financial analysts’ earnings forecasts and stock recommendations. The biggest recent advance is the creation and increasing accessibility of the growing number of databases for financial disclosure (Flesher, 2010), which could be largely attributed to the disappearance of barriers to international investment and the likewise improvement in technology, as pointed out by Stulz (2009).

2.6 Summary

This chapter has discussed the concept of accounting disclosure in capital market; corporate governance; market capitalisation; and globalisation and accounting disclosure in this market. Accounting information and capital markets have a distinct relationship in that corporate disclosure is important in ensuring efficient functioning of capital market. Firms provide disclosure through regulated financial reports (e.g. Healy and Palepu, 2001).

In addition, firms’ disclosure strategies influence the speed with which information gets into prices. Despite the significant importance appropriated by the financial reporting community on the impact of disclosure level, there remains a lack of established tenets in the relationship between disclosure level and cost of equity capital (e.g. Botosan, 1997). Fundamental analysis and market efficiency tests are the major sources of demand for accounting research. It has been noted that firms that promote informative accounting disclosures are likely to exhibit leverage measures (e.g. Iatridis, 2006). Furthermore, financial globalisation caused the disappearance of the barriers to international investment – along with improvement in technology – and it likewise enabled the speedy increase in the number of firms obtaining listings on foreign stock exchanges (e.g. Gray et al., 1995; Stulz, 2009).

Chapter 3: Research Methodology

3.1 Introduction

This chapter provides a systematic approach aimed to answer the research question identified in Chapter 1. This approach is through adoption of a specific research design (qualitative), data collection (secondary data), and analysis technique, as well as identification of ethical considerations governing the overall pursuit of this research.

3.2 Research Design

The research design commonly used in research are qualitative and quantitative, or the combination of both. Qualitative design is that which is pursued not to quantify or measure variables but to focus on the language and meaning of people’s own construction of their experiences and beliefs (Lapan et al., 2012) it is characterised by multiple methods, as well as a naturalistic or interpretive approach. Its emphasis is the daily life of a certain person or event. As this research design is in effect naturalistic and interpretive, the qualitative researcher examines a phenomenon in its natural setting, of which he/she likewise tries to decipher such phenomenon in relation to the meanings attached to them by people (Wigren, 2007). Statistical methods have no room in qualitative research since the involved data are not numerical in form and could not hence be quantified or measured. Qualitative research does not also intend to test theory or hypothesis as it is a feature of quantitative research (Flick, 2008; Bryman, 2013). In addition, the qualitative research method is aimed at describing certain aspects of a phenomenon (i.e. accounting disclosure in capital market), with a perspective of explaining the subject of study (Trochim et al., 2010).

Quantitative research, on the other hand, adopts statistical techniques in explaining a certain phenomenon, and likewise presents results statistically (Olagbemi, 2011). It tends to determine whether variance in x (market capitalisation) causes a corresponding variance in y (money raised), and to what extent this is taking place. In the accounting field, quantitative studies exclude the potential of investigating in-depth issues that usually ask the ‘why’ and ‘how’ of accounting practices. The quantitative research tradition is being adopted in this domain, enabling the explanation of phenomenon variance through systematic comparisons, connoting the central role of analysis of causal relationships between variables (Green, 2005; Hoque, 2006); that is, market capitalisation and money raised. Since this study aims to quantify the relationship between market capitalisation and raising capital amongst selected LSE-listed companies, the quantitative research design is adopted.

3.3. Data Collection Technique

The common data collection techniques utilised in research are primary and secondary. Primary techniques are those that involve the collection of original or first-hand data for a specific purpose, such as interviews, questionnaires, focus groups, etc. (Mukul and Deepa, 2011). Secondary techniques, on the other hand, are those that involve non-original or second-hand data gathered by another for a specific purpose, which are again used by the researcher for his own study (Beri, 2008). Examples of secondary data are those from peer-reviewed journals, books, corporate reports, and online resources, to name a few.

This study’s utility of primary data is that which is focused on processing raw information from selected LSE-listed companies, which are generated through the London Stock Exchange website. The companies are from various sectors and are trading in the UK capital market through LSE. In particular, there are 50 companies from an original list of 350 involved in the study.

Secondary data, on the other hand, are applied through their reference to the value of accounting disclosure in the UK capital market, which is drawn from the extant literature. A desk-based approach is adopted as the study pursues collection of primary and secondary data from available sources.

3.4 Sampling Technique

Sampling is the process that allows the researcher to select the subjects or research participants in the study. Selecting a sample necessitates defining the group of cases, also known as the population that meets specific criteria, to which the study’s results are intended to form a generalisation (Dutta, 2013).

The non-probability sampling technique is used to select which companies are to be included in the sample from a range of data in the data set. No specific criterion was adopted for the selection. According to Dutta (2013), judgment sampling is applied when utilising the non-probability sampling technique, whereby the researcher has direct or indirect control over such selection.

3.5 Analysis Technique

Regression analysis is used to analyse the relationship between market capitalisation and money raised amongst selected LSE-listed companies. It is important to note that these companies are assumed to undertake accounting disclosure in their operations, as required by the UK accounting policies for corporations and incorporations. Finding out the relationship between market capitalisation and money raised would suggest whether a correlation exists between these two variables. The independent variable (x) is market capitalisation, whilst the dependent variable (y) is money raised.

Further, the analysis of findings involves the use of linear regression to find out the relationship between market capitalisation and money raised, and is likewise largely based on the extant literature, through which research inferences and enquiries are to be conducted.Themes are grouped according to their manner of discussion, citing their relevance in relation to theories being adopted – agency theory, positive accounting theory, and game theory. The idea is to examine the extant literature on the value of accounting disclosure in the UK capital market and analysing them using various works and theories as evidence.

The 50 LSE-listed companies are assumed to adopt accounting disclosure, as required by FASB, GAAP, GAAS, and by LSE itself. Whether or not they adopt accounting disclosure vis-a-vis their market capitalisation and money raised is not a point of discussion however, considering that the dataset does not include an indication whether the involved companies indeed observed accounting disclosure or not. Therefore, it is assumed that these publicly listed companies employ accounting disclosure as this study examines the relationship between their market capitalisation and money raised.

3.6 Ethical Considerations

Ethical considerations are important aspects in any research endeavor to ensure the integrity of research. In this study, first of these considerations is the adoption of a specific referencing style to cite the secondary data sources. This referencing style is identified in this research as the Harvard referencing style. Furthermore, it is important to acknowledge the sources of data being used in the study since they are not owned by the researcher but are only borrowed from another. Therefore, using certain ideas in the research without citing them in the references and within the text would constitute plagiarism, as the researcher is using the ideas of another and appears to be citing them as his/her own, which are in fact not (Johnson and Christensen, 2014). The value of paraphrasing or using one’s word in citing secondary sources is also noted here as an aspect of ethical considerations.

3.6 Summary

This chapter covered a discussion of specific research design to be employed (quantitative), a data collection technique (primary and secondary), analysis technique (regression and survey of the literature), and ethical considerations. The suitability of the quantitative research design for this study is found in its adoption of numerical data and the presence of quantification or measurement of variables. The variables being examined are market capitalisation and money raised of selected companies listed in the London Stock Exchange.

Non-probability sampling is used to select the companies from a range of companies in the LSE dataset. In determining the relationship between money raised and market capitalisation, it is assumed that they likewise undertake accounting disclosure.

Chapter 4: Analysis

4.1 Introduction

This chapter is designed to provide analysis of the research question and address the aims and objectives identified in the first chapter. Specifically, it outlines the value of accounting disclosure in UK capital market, focusing on London Stock Exchange, and discusses theories – agency theory and signalling theory – as theoretical underpinnings of the research.

4.2 The Value of Accounting Disclosure in the UK Capital Market

Data from the dataset of London Stock Exchange (2014) are used to find out if there was a significant relationship between market capitalisation and money raised amongst involved corporations listed in this financial market. The total number of companies in the dataset is limited only to 50, from a list of 350. It must be noted that all of these companies are assumed to comply with the needed accounting disclosures of FASB, GAAP, and GAAS, which is the rule for listed companies in LSE (Benston et al., 2006; Krivogorsky and Dick, 2011). Appendix-1 provides the list of the 50 companies for which an analysis of a relationship between market capitalisation and money raised is performed using a linear regression.

With the linear regression, the independent variable (market capitalisation) and the dependent variable (money raised) are analysed. The purpose is to determine any relationship between these variables for companies that are assumed to observe accounting disclosures, as they are listed in the London Stock Exchange, where such disclosure is highly required, compared to unincorporated organisations (Benston et al., 2006; Haque et al., 2008).

In Figure 1, the P-value indicates that for every increment increase in market capitalisation, one can expect a point average to go up by 4 per cent. On the other hand, the P-value for the slope coefficient – which is 0.00 – is significant, which means that there is a significant relationship between market capitalisation and money raised. Figure 1 also suggests that with the slope coefficient of 0.09, every increase in the money raised means a corresponding increase in market capitalisation by 90 ?m. With the positive coefficients (positive slope = 0.09), a positive relationship between the two variables (market capitalisation and money raised) is indicated. This is congruent with the literature in which it was posited that financial globalisation, which is promoted in capital markets, tends to maximise shareholder wealth. Stulz (2009) and Haque et al. (2008) likewise stressed access to finance, firm financing, and financial performance as outcomes of corporate disclosure and governance. The regression graph in Figure 2 however suggests non-typical fluctuations in regression lines, given the standard error of 82.30 shown in Figure 4.

CoeffsSt Errort StatP-valueLower 95%Upper 95%Lower 90%Upper 90%
Market Cap (?m)

Figure 1: Regression details

When graphed, the regression is shown as:

Figure 2: Graph of the linear regression

Given the above graph, the regression equation being derived is:

Money raised: 27.6 + 0.09x R? = 18.4%

The regression statistics in Figure 3 shows that 18.5 per cent of the variability in market capitalisation is explained by money raised. Standard error explains the typical deviation error between the actual values in money raised and the predicted values.

Regression Statistics
Multiple R0.430
R Square0.185
Adjusted R Square0.168
St Error82.301

Figure 3: Regression statistics

As mentioned, the 0.00 P value for the slope coefficient indicates a significant relationship between market capitalisation and money raised. What can be inferred here is that the selected LSE-listed companies have positive market capitalisation and money raised, which is consistent with the claim of Kamaruddin et al. (2004) in relation to raising capital as an outcome of trading publicly (which in turn means adopting corporate disclosure). The literature also abounds with information on raising equity finance in relation to voluntary disclosure (Kothari, 2001; Iatridis, 2006) in which it was asserted that firms tend to pursue disclosure of accounting information in their attempt to ensure consistency of their accounting policies with the accounting regulation. In the same manner, the results suggest that the involved firms in the survey tended to have an accelerating general pattern of market capitalisation and money raised, given the assumption of their observance of accounting disclosure. It is interesting to note that how disclosure standards in annual reports are set is influenced by market capitalisation, as forwarded by Abdolmohammadi (2005).

Further, as has been previously acknowledged, historical perspectives are present in the accounting literature (e.g. Kothari, 2001), which this analysis is taking on in identifying the value of accounting disclosure in capital markets. The Companies Acts and other legislation in the UK have for many years required companies to adopt financial disclosure on at least a minimum level. Only audits are required by the Acts in which it spells out that an auditor, aside from being a member of a recognised body of accountants, must also be independent. The UK Generally Accepted Auditing Standards (GAAS), which was established by an independent body outside the profession, lays down audit guidelines, which along with Generally Accepted Accounting Principles (GAAP), is used as the basis for audit and disclosure requirements imposed in the London Stock Exchange (LSE) (Benston et al., 2006). The filing of the annual financial reports of publicly owned companies in the UK is done with LSE, the agency tasked to make and enforce the securities trading rules and the financial reporting requirements of these companies (Tracy and Barrow, 2012). This is the reason why this study assumes that the 50 selected LSE-listed companies adopt accounting disclosure, to which the relationship of their market capitalisation and money raised is being analysed. Murray and colleagues (2006) noted in the literature review that the implementation of international financial reporting standards fosters consistency and reliability in financial reporting due to the enhanced quality of the comparability of financial statements. With the relationship between market capitalisation and money raised in selected LSE-listed firms in the study, Griining‘s (2011) assertion would be interesting to consider – that linking market capitalisation and accounting information could be carried out to analyse corporate disclosure.

The value of accounting disclosure in the UK capital market is seen in the fact that inadequate disclosure in an annual report is tantamount to utilising erroneous accounting methods for profit measurement, identification of owner’s equity and values for assets and liabilities. Improper accounting methods or misleading accounting disclosure will lead to a misleading financial report. Unpleasant lawsuits against the business and its managers are the possible outcome of these deficiencies (Tracy and Barrow, 2012). In the survey of literature, Haque and colleagues (2008) also noted that poor firm-related corporate governance might hamper the effectiveness of capital markets to improve the standards of corporate governance, parallel to what Tracy and Barrow (2012) discussed. Haque and colleagues further mentioned the importance of transparency and accountability in corporate governance, which could be used to analyse the value of disclosure. Similarly, Kothari (2001) posited that evidence from research on market efficiency tests in relation to accounting information, fundamental analysis, and relevant value of financial reporting appears to offer helpful stances in decisions for capital market investment and corporate financial disclosure. The literature also cited the impact of pressures from international capital markets on the annual reports’ corporate voluntary disclosures in the UK multinational enterprises (Gray et al., 1995; Tracy and Barrow, 2012).

Further, disclosure is crucial in the efficient functioning of a capital market (i.e. LSE) because of the fundamental roles it plays in decreasing the information asymmetry between management and shareholders, between investors and management, and between various kinds of investors. In the literature review, the same was also asserted by Healy and Palepu (2001) as they observed that corporate disclosure is an important element in the functioning of an efficient capital market. There is a link between the issue of voluntary disclosure on one hand, and information asymmetry theory, on the other (Neri, 2011). Information symmetry refers to a condition in which some people know some relevant information of all parties involved. The market becomes inefficient because of lack of access of the market participants to the information needed for their decision making. However, this is not the case when disclosure is taken in. Thus, not only does better disclosure regulate information asymmetry, but it also mitigates inefficiencies within the market (Neri, 2011). Healy and Palepu (2001) also made the same claim as they posited that demand for financial disclosure and reporting emerges out of information asymmetry and agency conflicts between the management and outside investors.

4.3 Financial Globalisation of Capital Markets

The accounting directives of the European Union (EU) serve as the major recent international influence on UK accounting as the former’s attempt to harmonise accounting rules across countries within the European Union (EU). An alternative strategy was employed by the EU upon the Commission’s proposal that beginning in 2005, the preparation of consolidated accounts by all listed companies must be on the basis of International Financial Reporting Standards (IFRS). In addition, IFRS could be used by companies for their individual accounts, with which they must seek the permission of their national government. The UK has taken an affirmative response on this since 2005 (Benston et al., 2006). This new rule by the EU did not draw much debate in the UK. The Accounting Standards Board (ASB) has been trying to converge with IFRS, as considerable differences are found between ASB standards and those of International Accounting Standards Board (IASB). At the very least, the role of the ASB is to supervise the implementation of IFRS in the country, address any potential problems as they arise, and set standards for individual entity reports that keep on adhering with the UK accounting standards (Benston et al., 2006). It may be noted that the presence of financial globalisation has enabled national disclosure laws to have extensive effects on the welfare of a specific country, firm, and investor portfolio (Stulz, 2009). Moreover, the size of the capital market in the UK appears to be an important factor that attracts foreign companies to LSE, considering its dominant position in Europe.

In the dataset, the reality of financial globalisation was exemplified in the inclusion of foreign companies in LSE, such as Gibraltar, Cayman Islands, IM, British Virgin Islands, Israel, and Canada, indicating that the UK capital market is not solely limited to the UK alone (See Appendix-1). This is what Stulz (2009) claimed in the literature review that financial globalisation has led to the disappearance of the barriers to international investment and the increasing accessibility of the growing number of databases for financial disclosure (Flesher, 2010, in which information technology has played a great role (Stulz, 2009).

Strong considerations are also placed on the market reason in that a high level of visibility is indicated in a London listing, both in the UK and the rest of the EU (Gray and Roberts, 1997). In relation to this, a note-worthy point is that of Stulz (2009) in which he stated that financial globalisation initiated the disappearance of barriers to international investment and the likewise improvement in technology, vis-a-vis the increase disappearance of the firm’s cost advantage for securities to trade publicly in its country of location. Moreover, with financial globalisation, the geographical location is no longer an important factor in the trading of securities on organised capital markets, as exemplified in the example of London Stock Exchange (Stulz, 2009).

4.5 Theories in Accounting Disclosure

4.5.1 Agency Theory

Agency theory explains the theoretical underpinning with the problem of information between management and shareholders as well as between management and investors (Neri, 2011; Desoky, 2009). The stewardship theory is used to describe these relationships, which may explain the reason for firms’ decision to disclose voluntary information in their annual reports. As an aspect of the agency relationship between them, decision-making authority is being delegated to the firm’s agents by its principals. This delegation leads to agency problems because of the agent’s incentives to focus on increasing his own wealth than that of the principal. In this regard, the market capitalisation and money raised in selected companies might indicate either of the two, but a thorough investigation would be required for this. In addition, the firm’s separation of ownership and control leads to information asymmetry in that it is assumed that the agent has access to higher information and utilises such information toward maximising his own interest at the expense of the principal. This scenario is regarded as the moral hazard problem that involves not only fraud but also such actions involving trade-offs between risk and reward (Neri, 2011). It could be inferred that the reason why this becomes possible for agents is the notion that firms’ profitability is not adversely affected by disclosure of sensitive accounting information, as had been claimed by Murray and colleagues (2006) in the literature review. In general, agency cost is a task of the potential conflicts amongst the firm’s managers, shareholders, and creditors. With the increase of these conflicts (as well as of agency costs), a corresponding increase in the demand for monitoring takes place as well. Credible disclosure – including accounting information – is part of monitoring being demanded of the firm because shareholders and creditors lack direct access to its performance information. Agency theory describes the choices that agents have concerning policies and information disclosure, which must be included in the annual reports. Through an independent outside auditor, principals possess the right to verify the accuracy of the annual reports prepared by the agents (Neri, 2011). In the same manner, Healy and Palepu (2001) inferred that regulators, auditors, and other intermediaries of capital market enhance the credibility of management disclosures. The information entered into the annual reports is regarded as an important tool to reduce information asymmetry and agency costs. Agency theory assumes that the costs of the agency relationship (including the monitoring costs involved to monitor managers and the result of their self-serving behaviour) permanently depress the value of the firm (Neri, 2011). In the literature review, Watson and colleagues (2002) also used agency theory in their study in an attempt to explain voluntary disclosure of ratios in the annual reports of firms where they revealed some evidence of a relationship between ratio disclosure and firm’s performance, size, and industry type.

Thus, agency theory explains the extent of disclosure of a firm, in which it postulates that the increased independence that the agent experiences results in the agent’s less likelihood to disclose information to the principal. The greater the dependence of the agent on the principal for financing, the more likelihood for information to be disclosed to the principal (Kamaruddin et al., 2004). Thus, disclosure in capital markets increases the fairness of these markets and causes price manipulation to become more difficult.

4.5.2 Signalling Theory

The signalling theory explains that financial reporting originates from the desire of the management to have disclosure of its superior performance, in which good performance will lead to enhancement of the reputation and position of the management; and good reporting is regarded as one area of good performance (Kamaruddin et al., 2004). Information asymmetric takes place in the perceived better information of the management than that of outside investors. Voluntary disclosure is a way to provide more information, whereby the level of information asymmetric enables reduction, which is one of the apparent incentives that motivate managers towards disclosure. The firm intends to benefit from favourable voluntary disclosure since such will lead to reduction of information asymmetric and will in turn reduce its cost of capital (Kamaruddin et al., 2004). This is exemplified in Iatridis’ (2006) assertion, that firms are likely to pursue disclosure of accounting information in their (firms) attempt to assure market participants of the consistency of their accounting policies with the accounting regulation and thereby address their stakeholders’ information needs. In a similar fashion, Gray and colleagues (1995) inferred that firms choose to disclose information in the context of capital market pressures because of an intention to reduce their cost of capital, which is also supportive of the signalling theory. Moreover, Walker and Vasconcellos (1997) asserted that information asymmetry is an imperfection of a capital market, affecting debt and equity. A comparable argument for information asymmetry on which equity pricing depends can also be made for the market’s valuation of the firm’s debt.

The above discussions provide evidence of the incentives available to firms as they decide to pursue the voluntary disclosure policy. Apart from enhancing the public image of the firm, the policy could also allow the firm to enhance its ability to raise capital.

4.6 Summary

The value of accounting disclosure in the UK capital market is seen in the fact that inadequate disclosure in an annual report has corresponding legal implications, as such is equivalent to the use of wrong accounting methods in the measurement of profit and determination of values for assets, liabilities, and owner’s equity. In addition, misleading accounting disclosure results in a likewise misleading financial report. Improper disclosure also suggests poor corporate governance, which might obstruct the effectiveness of the UK capital market to improve the standards of its corporate governance. Apart from the fact that better disclosure regulates information asymmetry, it also promotes mitigation of inefficiencies within the market. The regression analysis indicates a significant relationship between market capitalisation and money raised amongst selected companies listed in London Stock Exchange. It is suggested that these companies increase in money capitalisation as they likewise increase in money raised.

Agency theory infers that the costs of the agency relationship (i.e. the monitoring costs to monitor managers and the result of their opportunistic behaviour) permanently depress the value of the firm. The information entered into the annual reports allows reduction of information asymmetry and agency costs. In signalling theory, the value of accounting disclosure in UK capital market is demonstrated in an attempt to assure market participants of the consistency of their accounting policies with the accounting regulation, and hence respond to information needs of their stakeholders. Additionally, firms pursue disclosure of information because of the intention to reduce their cost of capital.

Chapter 5: Conclusion and Recommendations

5.1 Conclusion

This study has been centred on determining the value of accounting disclosure in the UK capital market, citing the relationship between market capitalisation and money raised of companies trading in this market. The quantitative research tradition is adopted as the specific research design, using linear regression as the statistical process in analysing the data. This research direction allows for identifying whether market capitalisation leads to increased money raised amongst 50 selected LSE-listed firms. The adoption of the quantitative research design has indicated the central role of the analysis of causal relationships between market capitalisation and money raised. It is assumed that the selected companies adopt accounting disclosure, which is required of them by IFRS, GAAP, GAAS, and even by LSE itself. The dataset is taken from the LSE website, from which only 50 companies are selected through the non-probability random sampling technique.

The regression analysis demonstrates a 0.00 result of the P-value for the slope coefficient, which is considered significant, and thus connotes a significant relationship between market capitalisation and money raised. The regression result also revealed that market capitalisation increases by 90 ?m in every increase in money raised. The positive coefficients likewise suggests a positive relationship between the two variables. The result coincides with the assertion in the literature that access to finance, firm financing, and financial performance are outcomes of corporate disclosure. This is also indicative of raising capital as an outcome of trading publicly, which in turn implies adoption of corporate disclosure. It has been noted that whether the selected firms indeed adopt accounting disclosure or not is no longer considered in the study, as this information is not stated in the data source. Thus, such adoption is assumed as part of the requirement for LSE-listed companies.

The selected show a tendency to have an accelerating pattern of market capitalisation and money raised as shown by the linear regression result, with the assumption of the value of accounting disclosure being adopted.

As mentioned, the necessity of accounting disclosure for the capital market has been earlier established by the IFRS, GAAS and GAAP, serving as basis for audit and disclosure requirements imposed in LSE. Moreover, the enhanced comparability quality of financial statements allows consistency and reliability in financial reporting because of the presence of international financial reporting standards.

The study points to advantageous and beneficial outcomes for the firm as a value of accounting disclosure in the UK capital market, as inadequate disclosure is a result of the espousal of erroneous accounting methods for profit measurement and identification of owner’s equity and values for assets and liabilities. Another value of accounting disclosure in the capital market is the smooth flow of the effectiveness such market in enhancing the standards of its corporate governance. Other valuable impacts are regulation of information asymmetry, and mitigation of inefficiencies with this market.

Furthermore, financial globalisation of capital markets show the emergence of the harmonisation of accounting rules across countries within the EU. The existence of financial globalisation led national disclosure laws to form extensive impacts on the well-being of specific countries, firms, and investor portfolios. Foreign companies are attracted to trade in LSE due to the size of this capital market. It has been noted that the inclusion of firms from foreign countries, which trade in LSE exemplifies the occurrence of financial globalisation in the capital market, whose operation is not limited to the UK alone. This fact is congruent with the notion that financial globalisation removes certain barriers that otherwise prevent international investment and accessibility of foreign capital from reaching the UK capital market.

Agency theory is cited to provide theoretical underpinning to the study. It is inferred that firms’ agents are delegated with decision-making authority, which in turn leads to agency problems due to their (agents) incentives to emphasise on the increase of their own wealth rather than that of the principal. This results in a corresponding increase in disclosure monitoring. On the other hand, the signalling theory presents the advantages for a firm in relation to financial reporting (including accounting disclosure) in that financial reporting enables enhancing the reputation andposition of the management. As emphasised earlier, reduction of cost of capital and information asymmetry are two of the reasons for the value of accounting disclosure, which the signalling theory likewise stresses. Moreover, the value of accounting disclosure is seen in firms’ desire to assure market participants of the consistency of their accounting policies and thus address their information needs and mitigate inefficiencies within the market. As information asymmetry serves as an imperfection of a capital market, the value of accounting disclosure is found in the apparent pursuit to address this imperfection with this market.

The implications to research include the furtherance of the significance of the efficiency and adequacy of accounting disclosure as a requirement in the capital market, and the contribution of the study to the large body of literature that deals with the value of accounting disclosure.

5.2 Recommendations

Given the conclusion, the recommendations being presented are as follows:

Pursue a study on the impact of financial globalisation on financial reporting.

This study will provide further evidence on the extent of the impact of financial globalisation on financial reporting. It will further give light to the role of financial globalisation in accounting disclosure embodied in the current study, given that the concept serves as an important factor to the disappearance of borders in accessing the capital market.

(2) Undertake a study on the role of audit committee in corporate governance.

This study aims to explain the role of audit committee in the enhancement of corporate governance using agency theory. This proposed study will provide further knowledge and evidence to agency problems in corporate governance, using a theoretical direction.


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Appendix-1: Selected LSE-listed Companies

CompanyCountry of Inc.SectorMarket Cap (?m)Money Raised (?m)
MICRO FOCUS INTERNATIONALUKSoftware & Computer Services2421.470.00
STRAT AERO PLCUKSupport Services10.390.65
HAVERSHAM HLDGS PLCUKGeneral Financial32.3030.00
FEVERTREE DRINKS PLCUKBeverages190.1593.33
QUARTIX HLDGS PLCUKSoftware & Computer Services63.190.00
NEKTAN PLCGibraltarTravel & Leisure50.103.63
ENTU (UK) LTDUKGeneral Retailers67.9032.80
FINSBURY FOOD GROUPUKFood Producers76.6835.00
MXC CAPITAL PLCUKGeneral Financial31.410.00
EDISTON PPTY INV CO PLCUKEquity Investment Instruments96.9095.00
GREEN DRAGON GAS LTDCayman IslandsOil & Gas Producers754.280.00
INDUSTRIAL MULTI PROPERTY TRUST PLCIMReal Estate Investment & Services4.370.00
C4X DISCOVERY HLDG PLCUKPharmaceuticals & Biotechnology32.0711.00
ATLAS DEV & SUPPORT SERVICES LTDCayman IslandsEquity Investment Instruments60.980.00
JIMMY CHOO PLCUKPersonal Goods603.78141.29
FULHAM SHORE PLC(THE)UKTravel & Leisure24.941.61
GAMMA COMMUNICATIONS LTDUKMobile Telecommunications181.0782.59
CROSSRIDER LTDUKMedia154.4045.90
CAMELLIAUKGeneral Financial250.670.00
PEWT SECURITIES PLCUKEquity Investment Instruments44.900.00
GENERAL INDUSTRIES PLCUKPharmaceuticals & Biotechnology1.570.93
MEDAPHOR GROUP PLCUKHealth Care Equipment & Services11.074.68
ATLAS MARA CO NVEST LTDBritish Virgin IslandsGeneral Financial7.900.00
PLUTUS POWERGEN PLCUKGeneral Financial3.780.68
AUCTUS GROWTH PLCUKEquity Investment Instruments1.450.97
ATTRAQT GROUP PLCUKSoftware & Computer Services11.031.53
FAIRFX GROUP PLCUKGeneral Financial31.843.53
OPTIBIOTIX HEALTH PLCUKForestry & Paper6.463.30
B.S.D CROWN LTDIsraelSoftware & Computer Services52.720.00
PRESSFIT HLDGS PLCUKIndustrial Metals5.0910.18
SAVANNAH PETROLEUM PLCUKOil & Gas Producers77.4929.29
TRITAX BIG BOX REIT PLCUKReal Estate Investment Trusts383.89150.00
BACANORA MINERALS LTDCanadaMining66.534.75
DJI HLDGS PLCUKTravel & Leisure150.769.00
EPWIN GROUP PLCUKConstruction & Materials131.2910.00
BLACKSTONE / GSO LOAN FINANCING LTDUKEquity Investment Instruments209.62206.52
SPIRE HEALTHCARE GROUP PLCUKHealth Care Equipment & Services854.30315.00
ERGOMED PLCUKPharmaceuticals & Biotechnology46.7211.00
TENGRI RESOURCESCayman IslandsMining18.260.00
SSP GROUP PLCUKFood & Drug Retailers1061.62467.10
JIASEN INTL HLDGS LTDBritish Virgin IslandsHousehold Goods102.802.33
SQN ASSET FINANCE INCOME FUND LTDUKEquity Investment Instruments154.50150.00
CAPITAL & REGIONALUKReal Estate Investment & Services327.60165.00
CLEARSTAR INCCayman IslandsSoftware & Computer Services21.788.84

(Source: London Stock Exchange, 2014)

Free Essays

Finance and Accounting Assignment

Part A:

Grey Plc is a distributor of professional equipment and supplies and has shown varying performance over the past three years. This report will aim to analyze the trends in financial performance of the company through the aid of liquidity ratios, profitability ratios, asset utilization ratios, gearing ratios, and investors’ ratios. The report will begin with an analysis of the company’s liquidity position, followed by its profitability, asset utilization, gearing ratios, and investors’ ratios.

Liquidity Analysis:

The firm’s liquidity position can first be measured through its current ratio which shows a firm’s ability to meet its current liabilities through its current assets. In the case of Grey Plc, the firm’s current ratio is increasing from 2009 to 2011 as it began from 2.00 in 2009, increased to 2.13 in 2010, and then further increased to 2.18 in 2011 which means that the firm has approximately double the current assets to pay off its current liabilities. One of these current assets is cash as the company’s cash balance has increased from ?100,000 in 2009 to ?150,000 in 2010 and then to ?250,000 in 2011. This shows that the company is in a highly liquid position as it is increasing its cash balance. However, this may also mean that the firm is not properly investing its free cash to earn a return. The company’s acid test ratio got lower from 2009 to 2010 but then increased in 2011 to 1.40 showing that in previous years inventory may have been a larger part of the firm’s current assets than it was in 2011.

Profitability Analysis:

The profitability ratios show how well the company is generating profit. The company’s sales have increased from 2009 to 2011, which shows a positive trend as sales were 5% more in 2010 than they were in 2009 and were 10% more in 2011 than they were in 2009. However, the company’s gross profit percentage has decreased from 2009 to 2010 from 40% to 33.6% which means that there may have been an increase in the company’s cost of goods sold. However, the company’s operating profit percentage has decreased from 2009 till 2011 from 7.8% in 2009 to 7% in 2011. This means that while the company’s sales have increased, either the company’s cost of goods sold have increased or the company’s operating expenses may have increased, which caused a reduction in the company’s operating profit margin. Moreover, the company’s bad debts have also increased by 10% per annum which is an additional expense to the company. The expansion programme in 2009 may have been a cause to the company’s decreasing operating profit margin as well.

Asset Utilization Ratio Analysis:

A problem that can be seen within the company is the company’s accounts receivable turnover ratio which is decreasing through the years. This shows that the company is not able to quickly recover its accounts receivable which is not seen as a positive sign as the company’s bad debts balance is also increasing. The firm’s inventory turnover ratio is increasing which means that the firm is quickly able to turn its inventory into sales which is seen as a positive sign and can also be attributed to the fact that the company’s sales volume has increased. This suggests that the company is not holding large amounts of inventory stagnant. The company’s accounts payable days have also increased from 2009 to 2011 from 60 days in 2009 to double amounting to 120 days in 2011 which means that the company keeps cash in circulation for a longer period of time which can be seen as a positive aspect. Thus, while the company’s accounts receivable turnover is decreasing, the company is performing positively in inventory turnover and accounts payable days.

Gearing Ratio Analysis:

The company has decreased its level of gearing from the year 2009 to 2011 as gearing was at 40% in 2009, decreased to 35% in 2010, and further decreased to 30% in 2011. This means that the company is relying less on external finance and loans and is thus less financially geared which is also a positive performance indicator. The company’s interest cover ratio is decreasing from 2009 to 2011 which means that the company is less able to cover its level of interest with its outstanding debts. However, while the ratio is decreasing, it is still high at 7 times in 2011 which shows that the company is sufficiently capable of catering to its outstanding debt.

Investors Ratio Analysis:

The company has announced dividends of ?750,000 every year which is seen as a positive performance indicator. Moreover, the company’s earnings per share have increased significantly from 0.55 to 1.20 from 2009 to 2011 respectively which also shows a high growth level. The company’s operating cash flow per share has also increased over the years. Consequently, Grey Plc’s return on capital employed has also shown a positive trend from 8.5% in 2009 to 8.7% in 2011. The company’s return on equity has also increased from 15% to 20% respectively which shows that the company is substantiating adequate returns from its investment.

Conclusion of Analysis:

Grey Plc has shown commendable performance over the years and has been able to gain adequate returns in each of the respective areas defined above. To calculate the company’s Working Capital Cycle in days, we need to consider that the company’s accounts payable in days is increasing and the company’s inventory turnover is increasing, yet the company’s accounts receivable turnover is decreasing which means that the company’s working capital cycle is becoming longer. This is not a positive trend as it is eroding the performance of the company and in order to increase its working capital cycle in days, it is essential for the company to decrease its level of bad debts and increase its accounts receivable turnover.

Then the company will also be able to increase its net profit and will thus help the company improve its overall performance.

Part B:

(A)The theory of constraints is a management paradigm which describes operational or management processes as not being highly restrained by a large number of constraints but limited to a small number of constraints. The theory of constraints determines that there is usually one constraint in the managerial process which acts as the “weakest link” between the other parts of the process. The theory believes in removing this weakest link in order to improve the whole process and focuses upon finding the weakest part of the process in order to restructure the whole process around it (Bierman & Schmidt, 2012).

The theory of constraints emphasizes that in order to optimize short-term decision making, a firm’s managers should find bottlenecks or problems in the managerial or operation process and attempt to remove them in order to increase efficiency (Bierman & Schmidt, 2012).

(B) (i) A bottleneck resource is an asset which slows down the production process and causes other processes to slow down as well. It is also the machine which is using the most capacity (Mason, 2007). The bottleneck resource in the situation described in this case may be machine 1 as it requires the most machine hours per unit and also spends the most machine hours on product C. Product C has the least demand yet machine 1 spends the most time on producing it which may be a cause for it to be termed as a bottleneck resource.

(ii) Each machine has a limited capacity of 12,000 hours out of which it must produce products A, B, and C. Machine 1 requires 0.15 hours to produce product A, 0.20 hours to produce product B, and 0.20 hours to produce product C. With a 12,000 hours capacity, the machine can produce 12,000/0.55=21,818 products. Machine 2 requires 0.10 hours for product A, 0.18 hours for product B, and 0.15 hours for product C. Accordingly, the machine can produce 12,000/0.43= 27, 906 products. Machine 3 requires 0.10 hours for Product A, 0.15 hours for Product B, and 0.10 hours for Product C. Accordingly, the machine can produce 12,000/0.35=34,285 products.

So all three machines combined can produce 84,009 units. Thus, the company should produce 34,000 units of product A, 25,009 units of product B, and 25,000 units of product C. This will ensure that the company meets the demand for these products and uses all the capacity of the machines.

(C) The percentage of demand that Product A occupies is 25,000/70,000=0.35%. The percentage of demand that Product B occupies is 24,000/70,000=0.34% and the percentage of demand that Product C occupies is 21,000/70,000=0.30 %.

The breakeven point for product A: (x) (25) = (15) +70,000



The margin of safety is 34,000-3,400=30,600 units

The breakeven point for Product B: (x) (28) =15+68,000


X= 2,964

The margin of safety is 25,009-2,964= 22,045 units

The breakeven point for Product C: x32= 15+60,000


X=2,344 units

The margin of safety is 25,000-2,344=22,656 units

Thus, the optimal mix for each of the products is well above the breakeven point which means that using all three machines will enable the firm to produce efficiently and effectively.

Part C:

There are various investment appraisal methods which allow a firm to assess whether an investment is optimal and will produce the required returns or not. One of the popular investment appraisal methods includes the Net Present Value Method. According to the Net Present Value Method, the cash flows expected from an investment are discounted back to assess their present value. Usually, the investment with the higher Net Present Value is selected as the most worthy or optimal investment (Isaac, Leary, & Daley, 2010).

According to the Net Present Value Method, Project B is most appropriate for Blue Plc as it has a higher Net Present Value than Project A which amounts to ?36 million. There are advantages and disadvantages involved in using the Net Present Value Method which include the fact that the Net Present Value method accounts for the time value of money and measures the effects of inflation and other similar factors which may affect the value of the cash flows that the business is likely to generate in the future. Another advantage is that the cash flow before the beginning of the project and after the end of the project is considered in calculating the value of the Net Present Value. Measures such as the profitability of the projects and the risk involved in the project are both given high priority in the calculation of Net Present Value. Moreover, using this measure helps maximize a firm’s value (Isaac, Leary, & Daley, 2010).

There are also certain disadvantages of using the Net Present Value method, which include the fact that it is difficult to use and that the net present value cannot give an accurate assessment of which project would be a better investment if the projects are mutually exclusive or if they are not of equal value. Moreover, calculating the appropriate discount rate is rather difficult and may not be accurate. The discount rate is usually estimated which may mean that it may vary in actual terms. The Net Present Value may not give an accurate decision if the projects are of unequal duration and can thus not be used in all situations (Reilly & Brown, 2011).

However, in the case of Blue Plc, both projects A & B are of equal duration measuring four years and both require an initial investment of ?20 million. Thus, in this case using the Net Present Value Method may be appropriate as both projects are of the same duration and require equal investment and the same cost of capital.

The other investment appraisal method that can be used to assess the feasibility of investments is the payback period. As Project A and Project B are both of the same duration and both require four years for execution, the payback period for Project A is 4.5 years, which is longer than its execution. Comparatively, the payback period for Project B is 3.6 years, which is less than that required for the execution of the project and is less than that required in Project A. Therefore, according to the payback period method, Project B is the optimal investment as it has a lower payback period.

The advantage of using the payback period method is that it is simple to use and understand. This method enables a company to identify the project with the quickest return on investment, especially in the case when the company has limited cash and can only invest in a project which allows it to regain its money back as fast as possible. This is the case with Blue Plc as the company can only invest in one project and would require its money back as fast as possible (Bierman & Schmidt, 2012).

However, one of the problems with the use of the payback period method is that it completely ignores the time value of money and does not consider or evaluate the fact that cash flows may not be regular and may occur later on in the process of the project. There may also be some projects which have an acceptable rate of return but still do not meet the requirements for the payback period. This method also does not consider any cash flows that a project would generate after the initial investment has been recovered. Thus, it does not accurately give an assessment of the profitability of a project but only evaluates how long it will take to recover the initial investment of a project. Using this method may mean a company overlook many attractive projects only because the company is focusing upon short-term profitability alone (Bierman & Schmidt, 2012).

According to Blue Plc’s case, the payback period is lower which means that it is a feasible project with a higher rate of return. However, we must ideally combine this analysis with the analysis of other factors such as the Net Present Value to determine whether this project is the most optimum investment or not.

Accordingly, the better investment appraisal method is using the Net Present Value method as it accounts for the time value of money and also measures subsequent cash flows that a project generates after the initial amount has been recovered. The payback period is simple but does not provide a fully accurate picture. Moreover, in the case of Blue Plc when the cost of capital, duration of the project, and the initial investment required in the project are the same for both projects, the Net Present Value is the most appropriate investment appraisal method to use in evaluating the feasibility of both projects (Kim, Shim, & Reinschmidt, 2013).

However, using either method has generated the same result as Project B seems to be the optimal choice regardless of whether the payback period is used as the investment appraisal method or whether the payback period is used as the investment appraisal method.

Part D:

(A)There are various sources of finance that can be used by a business in order to finance its operations. However, the use of these sources of finance also involves various advantages and disadvantages. A privately owned business can use the owner’s savings and personal assets to finance business expansion or to finance the start of a business (Beck & Demirgue-Kunt,2006). The advantages of using this source of finance are that the owner does not have to pay any interest or share any of the profits with investors or others as he/she is using their own money in the business venture. There are also no acquisition costs and no major hassle in raising or using this source of finance. However, there is also risk involved for the owner in using his/her own personal savings which includes the fact that he/she may lose all of this money if the business goes into a loss (Berger & Udell, 1998).

Another source of finance for a business is allowing investors to invest in the business. In the case of a sole trader or a private limited company, the owners can allow partners to join in the investment or can turn the company into a public limited company.In the case of a public limited company, the owners can sell shares on the stock exchange in order to gain more finance. However, this will also mean that the owners of the company will lose a substantial amount of control in the company once investors are allowed to invest in the company. They will also be required to keep their investors happy and this can be a tiresome and pressurizing ordeal also resulting in conflicts. Profits will also have to be divided with the investors, meaning that the owners cannot keep all of the profits to themselves. On the other hand, the owners of the business will also be able to share the risk with other investors and will not be solely liable for all of the business losses (Mason, 2007).

Another major source of business finance is bank loans. They can provide a quick and reliable source of funding which also enables businesses to keep their persona operating cash to themselves for emergency situations. A business may also be exempted from paying back their loan in full if they file for bankruptcy and provided that they do not have the required amount. However, in order to obtain a bank loan, a business may have to provide collateral which may be a hassle or it may be difficult for a firm to obtain a loan if they do not have the required collateral. Interest payments will also have to be made on the loan which will mean that the business has to return more than they actually borrowed. Payments on the loan will also be due at specific times regardless of whether the business is doing well or whether it is not doing well (Beck & Demirgue-Kunt, 2006).

Another source of finance for businesses is government grants and loans. Some governments provide start-up and expansion programs to facilitate their business sector and these can prove to be a highly valuable opportunity for businesses to receive free finance. The interest rates on these loans are also much lower than the rates on other loans and are usually provided without collateral. However, the problem with obtaining government loans and grants is that there is usually a lot of red tape that has to be surpassed before the loan can be granted and thus it is not available to all businesses. The loan or grant is still a loan or grant and eventually has to be repaid (Berger & Udell, 1998).

(B) Break-even analysis uses a firm’s selling price of products against a firm’s fixed and variable costs in order to determine the quantity of products that a firm needs to sell in order to recover the costs it has incurred to produce those products. There are certain assumptions that the break-even analysis makes in order to calculate this quantity. First of all, the break-even analysis assumes that all costs can be categorized as either fixed costs or variable costs. However, on a practical basis, it is nearly impossible to accurately classify costs into these categories because some costs have both a variable and fixed proportion. Another assumption is that fixed costs remain constant at any level of activity, even when there is no production. However, this may also not pose a highly accurate picture and may not be able to accurately depict the true nature of fixed costs as some fixed costs may begin to vary with differing levels of output (Al-Habeeb, 2012).

The break-even analysis also assumes that the unit selling price will remain constant. However, in the contemporary business environment, this is not practical as the unit selling price may vary with differing consumer tastes and purchasing habits. As competition increases, firms may be constantly changing their unit selling price which then makes the break-even analysis void and inaccurate. The breakeven analysis also keeps inventory levels, the design of the product, efficiency and productivity levels, and variable costs constant (Tsorokidis et al, 2011).

The contemporary business environment involves high rates of competition, innovation, and varying productivity and efficiency levels. Moreover, other business problems and issues may also affect the rate of sales and the level of costs at various times in the production and selling process. Thus, in such cases, the break-even analysis is a highly limited model in assessing the number of units needed for sales to break-even (Berger & Black, 2011).

On the other hand, the break-even analysis is a simplistic model which can at least give a business a rough idea regarding how many units it needs to sell in order to recover its costs. It can be used in cases where selling prices and costs remain constant and perhaps in businesses where it is easy to categorize these costs into the separate categories of fixed and variable costs. Businesses should not completely rely upon the break-even analysis and may have to use other more thorough accounting methods in order to determine the optimum quantity to sell which would enable them to achieve a profit (Berger & Black, 2011).

Accounting and forecasting models are usually based upon assumptions and none of them exist without disadvantages. Thus, it is essential for a business to use all of these models with caution and only use them as a guideline in order to calculate various results for their business.


Alhabeeb, M. J. (2012). “Break?Even Analysis.” Mathematical Finance. pp.247-273.

Beck, T., & Demirguc-Kunt, A. (2006). “Small and medium-size enterprises: Access to finance as a growth constraint.” Journal of Banking & Finance, Vol.30(11) pp.2931-2943.

Berger, A. N., & Black, L. K. (2011). “Bank size, lending technologies, and small business finance.” Journal of Banking & Finance. Vol.35(3) pp.724-735.

Bierman Jr, H., & Smidt, S. (2012). The capital budgeting decision: economic analysis of investment projects. Routledge.

Isaac, D., O’Leary, J., & Daley, M. (2010). Property development: appraisal and finance. Palgrave Macmillan.

Kim, B. C., Shim, E., & Reinschmidt, K. F. (2013). Probability Distribution of the Project Payback Period Using the Equivalent Cash Flow Decomposition. The Engineering Economist. Vol.58(2), 112-136.

Liesen, A., Figge, F., & Hahn, T. (2013). “Net Present Sustainable Value: A New Approach to Sustainable Investment Appraisal.” Strategic Change. Vol.22 (3?4) pp.175-189.

Mason, C. M. (2007). “Informal sources of venture finance.” The life cycle of entrepreneurial ventures .pp. 259-299. Springer US.

Berger, N. & Udell, G. (1998). “The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle.” Journal of Banking & Finance. Vol.22 (6), pp.613-673.

Reilly, F. K., & Brown, K. C. (2011). Investment analysis and portfolio management. CengageBrain. com.

Tsorakidis, N., Papadoulos, S., Zerres, M., & Zerres, C. (2011). Break-Even Analysis. Bookboon.

Free Essays

The Role Of Accounting In The Collapse Of Game Group


The Game Group plc is a UK based Investment Company. It is specialised in the retail of video games and personal computers through retail outlets and eCommerce sites (Google Finance, 2013). On the 21st of March 2012, the company officially filed for administration as it became evident that it could no longer continue as a going concern (Robinson, 2012; BBC, 2012). Past experience suggests that accounting has contributed to many cases of corporate failure. This was the case with the failures of Enron, WorldCom and many other companies. The objective of this paper is to discuss how accounting contributed to the failure of The Game Group plc. The paper begins by presenting theoretical and empirical evidence on how accounting can contribute to corporate collapse in section 2; section 3 discusses how accounting contributed to the collapse of the Game Group by making reference to the evidence presented in section 2; section 4 provides a summary and conclusion of the paper.

Accounting and Corporate Collapse

Creative accounting has been cited as one of the principal causes of corporate collapse. Companies like Enron, WorldCom and Tyco International filed for Bankruptcy under Chapter 7 as a result of poor accounting. The managers of these companies were involved in lies, deceit, cover-up and above all shoddy accounting, which could not be sustained for long. As a result, the share prices of the companies were bound to fall and thus the companies themselves were bound to file for bankruptcy under chapter 7 of the US Bankruptcy Code.

Creative accounting involves the use of accounting techniques that may or may not be in compliance with generally accepted accounting principles (GAAPs) but that certainly deviate significantly ethical standards (Ghosh, 2010). When involved in creative accounting, managers often make use of novel approaches to reporting income so as to influence the outcome of contractual agreements that are determined by financial reports (Ghosh, 2010). Creative accounting involves systematically misrepresenting the true earnings and asset values of companies. Creative accounting has been responsible for a number of high profile cases of corporate failures such as Enron, WorldCom, Adelphia and Tyco International.

One of the most commonly used forms of creative accounting is earnings management. Earnings management occurs when management employ judgment in financial reporting and transaction structuring with the intent of altering financial information either to influence the outcome of contractual agreements that depend on financial reports or to mislead interested parties about the performance, changes in financial position and financial position of the company (Healy and Wahlen, 1999). Earnings management represents “a purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain” (Schipper, 1989). Most of the figures in the balance sheet and income statement are based on accrual accounting which arises because not all transactions are settled in cash at the time they are entered into. Therefore, accrual accounting must be used to record assets and liabilities that arise as a result of the time difference between the inception of the transaction and the time the transaction is settled. This has resulted in the use of discretionary accounting. Managers employ discretionary accrual accounting to satisfy their selfish desires (Heemskerk and Va der Tas, 2006). The use of discretionary accruals is considered earnings management when managers employ it to influence the share price of their company or to obtain some other benefit that is of a personal nature.

Earnings management has been an important subject of debate in the accounting literature with most studies focusing on understanding the factors that motivate managements to manae earnings. A bonus-maximisation theory has thus been suggested which states that managers manager earnings to maximise bonuses. For example, evidence suggests discretionary accruals are employed by managers to maximise short-term bonuses (Healy, 1985). Similar evidence is suggested in Gaver et al. (1995) and Hotlthausen et al. (1995) who observe that managers make use of accrual accounting to reduce earnings when earnings are above their maximum bonus level. However, such accruals are not employed when the minimum bonus level has not been attained (Holthausen et al., 1995; Gaver et al. (1995).

An income smoothing theory has also been suggested which argues that managers like to observe a smooth pattern in earnings. Consequently a number of accounting techniques are employed to ensure that earnings are smooth over time. Gaver et al. (1995) provide evidence that is consistent with the smoothing theory. In addition, Guidry et al. (1999) and Tao (2007) observe that earnings management is carried out because managers do not want significant differences to occur between actual and predicted earnings.

It has also been argued that managers hate reporting a decline in earnings. Consequently, accounting techniques are employed to ensure that the change in earnings over time is positive. Burgstahler and Dichev (1997) provide evidence that is consistent with this incentive by observing that managers tend to emphasise an increase in earnings in the Annual Report Section titled: “Management Discussion”. In Tenneco’s 1994 Annual Report for example, the CEO Dana Mead stated as follows: “I must emphasise that all our strategic actions are guided and measured against this goal of delivering consistently high increases in earnings over the long term” (Burgstahler and Dichev, 1997: 99). In addition Eli Lilly laid so much emphasis which lasted for a period of 33 years before being broken. Some firms emphasise the importance of increasing earnings during press releases or the announcement of earnings. The CEO of Bank of America for example, Richard Rosenberg in 1994 stressed the importance of increasing earnings in a press release by stating that “Increasing earnings per share was our most important objective for the year” (Burgstahler and Dichev, 1997: 100).

The foregoing indicates that managers are more inclined to reporting an increase in earnings rather than a decrease. Barth et al. (1995) for example suggests that firms tend to maintain an upward trend in earnings so as to improve valuation ratios such as the price-to-earnings (P/E) ratio, the price-to-book (P/B) ratio, etc. P/E and P/B ratios are important in determining how the market will value the price of the equity of a firm (Penman, 2007). Therefore, managers will be motivated to maintain high P/E and P/B ratios through earnings management so as to benefit from a high market valuation of their firms’ equity. Similar evidence is provided in DeAngelo et al. (1996) who observe that a distortion in a firm’s upward trend in earnings results in significant declines in the stock price.

Accounting and the Collapse of the Game Group

Section 2 above focused on understanding how accounting can lead to corporate collapse. The evidence shows that managers tend to make use of creative accounting techniques which results in an inflation of earnings and thus the share price. Given that the share price does not reflect its intrinsic value, the long-run effect is a significant decline in the share price with the ultimate effect being the collapse of the company. This section is concerned with whether there was any use of creative accounting in the Game group which led to its collapse. So far, the evidence shows that accounting had nothing to do with the collapse of the group. Rather, the company’s collapse can be attributed to a variety of other factors including poor strategic planning, declining video game industry, and the cyclical nature of the video games industry .

3.1 Poor Strategic Planning

It was rather, poor strategic planning on the part of the company that resulted in its collapse. The company failed to anticipate and plan for changes in its external environment. The company continued using strategies that were no longer relevant in the context of its external environment. In addition, the Game group had a poor pricing strategy. Prices of Game Group’s games were too high compared to prices of competitors such as Amazon and Play. Many customers are migrating from store shopping to online shopping. According to Administrators at Price Water House Coopers, Game Group’s collapse can be attributed to its ambitious overseas expansion and the closure of proximity stores. Game Group’s strategy was characterised by two fundamental problems. Firstly, the company expanded massively into different countries (Yin-Poole, 2012). This means that the company had significantly high levels of fixed costs which could not be sustained. When fixed costs are significantly high, the business risk of the firm increases significantly. Secondly, Game and Gamestation stores were in close proximity. This resulted in the cannibalisation of sales of one store by other stores (Yin-Poole, 2012). Therefore, many stores were simply incurring fixed costs which could not be covered by sales revenue.

3.2 Declining Video Games Industry

The company suffered significantly because of poor developments in its external environment. Wallop (2012) observes comments by the CEO of the company Mr Shepherd who claims that in 2012, the size of the video game market had declined by 40% from its 2012 figure. This contributed negatively to the performance of the company. The company’s share fell by 2.44 to 4.31p and resulting in a decline to less than ?15million. Customers made significant changes in their consumption of video games. Most customers were interested in buying only new releases such as Fifa 2012 and Modern Warfare. Lesser known titles could not perform well because of declining demand Wallop (2012). The Game Group could not survive because it had a lot of games in stock that did not meet the current tastes and preferences of consumers of video games.

3.2 Cyclical nature of the Video Games Industry

Despite making a profit of ?90million in 2009, the Game Group recorded a loss of ?15million in 2011 (Wallop, 2011). The main reason for this loss was the intense cyclical nature of the video games industry (Wallop, 2011). The market lacks exciting new hardware. In addition, the industry has been suffering from piracy. Lack of new hardware and an increase piracy has resulted in declining demands which has eroded industry profits. As a result the Game Group could no longer survive in the industry.

The Game Group was also affected by the introduction of digital games, which can be regarded as a perfect substitute for video games. For example, in 2010, sales of digital games totalled ?411m representing an increase by 23 percent from the 2009 figure. On the contrary, the video game industry witnessed a decline in sales by 17 percent to ?1.53billion between 2009 and 2010 (Wallop, 2011).

In addition, the development of smart phones and the IPAD has affected the video games industry. These devices come with free digital games. This resulted in the decline in video games sales and thus contributed to the collapse of the Game Group (Wallop, 2011).

Summary and Conclusions

The objective of this paper was to analyse the impact of accounting on the failure of Game Group. The above analyses show that Game Group’s collapse was in no way related to accounting failure. There was no evidence to suggest that managers at Game Group were involved in creative accounting. Unlike the case of Enron, and other major corporate failures, the Game Group had no special purpose entities which enabled it to high liabilities off the books. Game group’s failure can be attributed to poor strategic planning rather than to accounting failure.

Based on the analysis, there is no evidence suggesting that Game Group was involved in inappropriate accounting. Rather, the evidence shows that Game Group simply did not plan properly. Game Group did not put in place strategies that would enable it respond adequately to changes in its external environment. The company failed to analyse the threat of substitute products, new entrants, bargaining power of suppliers and customers as well as industry rivalry.


Healy, P.M., Wahlen, J.M., 1999. A review of the earnings management literature and its implications for standard setters. Accounting Horizons, 13, pp. 365-383.

Hayn, C., 1995. The Information Content of Losses, Journal of Accounting and Economics, 20, pp. 125-153

Heemskerk, M., and L. van der Tas. 2006. Veranderingen in resultaatsturing als gevolg van de invoering van IFRS. Maandblad voor Accountancy en Bedrijfseconomie: 571-579.

Holthausen, R. W., Larcker, D. F., Sloan, R., 1995. Annual Bonus Schemes and the Manipulation of Earnings, Journal of Accounting and Economics, 19 (1) pp. 85-100

Epstein, B. J., Jermakowicz, E. K., 2007. Interpretation and Application of International Financial Reporting Standards, Wiley and Sons Inc.

Penman, S. H. (2007) Financial Statement Analysis and Security Valuation, 3rd ed. Irwin: McGraw-Hill.

Schipper, K. 1989. Earnings Management. Accounting Horizons, pp. 91-102

Robinson, A. (2012) GAME officially files for administration Retailer fails to find “a realistic prospect for a solvent solution for the business”, available online at: [accessed: 29th March 2013].

BBC (2012) Game Group to file for administration, available online at: [accessed: 29th March 2013].

Wallop, H. (2012) Game shares slump on profits warning, loan breach fears, available online at: [accessed: 29th March 2013].

Wallop, H. (2011) Can Game Group survive?, available online at: [accessed: 29th March 2013].

Yin-Poole, W. (2012) Why Game Collapsed: PwC cites “unfortunate” proximity of stores and “ambitious” overseas expansion, available online at: [accessed: 29th March 2013].

Free Essays

MSc Development Finance

Furthering my knowledge in finance and economics is one of my goals. As a native of Brunei, a developing country, I would like to contribute to my country’s progress with the use of the knowledge and skills that I acquired during my undergraduate studies. Majoring in accounting and economics has provided me extensive knowledge of various economic principles and theories and their application in the business world. Although the University of Manchester has given me sufficient knowledge in the field that I have chosen, I believe that pursuing to study under this programme would provide me a broad yet focused knowledge in development finance and its practical application in the public sector.

I chose to pursue this programme because of its international focus, group work, and emphasis on learning public finance, bank and non-bank financial institutions, international finance organizations, aid agencies and other finance-related areas of study that can help in understanding how the financial theories governing our country and the world economy work. The program is also designed to teach me financial inclusion and microfinance in relation to poverty reduction.

My interest in development finance first sparked during my junior years. My wish to contribute to my country’s progress was further intensified by a course about economic policies of developing countries and their role in the international market. Working at the Ministry of Foreign Affairs and Trade Development in Brunei under the Finance Department for summer internship last summer 2007 has also provided me first-hand experience and knowledge in international trade.

I am confident that this university has the capacity to provide students with knowledge beyond the conventional financial educational program. The programme of University of Manchester also includes strengthening the analytical decision-making skills of students. It also offers wider academic opportunities and school resources that will deepen my expertise and broaden my perspectives. I am especially interested and looking forward to the overseas field visit which is a crucial part of the programme.

Most of the countries visited are developing countries like Brunei which face similar economic situations. The programme also allows students to conduct research in government and non-government organizations and other universities in the U.K. This can not only broaden my knowledge and hone my skills in finance, but also enhance my socializing and communication skills.

With hopes and persuasion in my mind, I aim to establish a career that can contribute to the further development of the financial situation in my county. One of the careers that I have in mind is a job in Brunei Investment Agency (BIA). As mentioned earlier, my country is a developing country. Although we are an oil-producing country, I believe that in terms of investment and contribution to the world economy, there is still much room for progress. Through this programme, I know that I would be able to obtain what is necessary to achieve my goal. Thus, I see myself successful in a career on this field and making Brunei a more developed and investment-focused country.


Free Essays


I would like to share the considerations which I have made in my choice to enroll in an Executive MBA program. I believe that the program would help me grow in both personal and professional realms, through an acquisition of both technical and soft skills. Through the rigor and discipline required, I will be equipped with academic content that will help me function more effectively in my job. In securing a Masters’ degree, I also to develop the necessary soft skills that will hone managerial effectiveness.

In particular, I want to be enlisted into a program that will help me further develop my skills of problem solving, written and oral communication skills, information retrieval and utilization, and collaboration. From a “working knowledge” level, I want the program to help me advance to a “can do” level. For my problem solving skill, I want to learn more on how to analyze and synthesize the emergence of problems, patterns and causes and to generate solutions or options in solving critical or complex issues through various means.

I also want to be capable of identifying new, innovative and creative ideas/options to overcome problems. For communication skills, I want to learn how to foster an atmosphere of open communication and to see things from another’s perspective. In addition, I want to learn how to assess the need of the audience in order to deliver the appropriate message and content.

For information management, I want to broaden my perspective by ensuring that information is free of distortions or personal bias. Finally, on collaboration, I expect the program to teach me how to develop and maintain a strong network of contacts in the industry and outside the company and use this to promote my company’s reputation. I also want to learn how to actively building lasting business relationships with other department or companies, private and government institutions.

Pursuing this degree is one of my educational goals in the near future. I want to secur the degree within the next 5 years as I simultaneously strive to continue developing my accounting and management skills. I will carry this out by conscientiously attending training and workshop sessions for accounting and administrative professionals. I would also be actively engaged in planning for my own development in my current workplace, suggesting means and venues for skills acquisition to my superior. If time permits, I also intend to join a professional organization within my field of expertise striving to work my way up to a role with greater responsibility and to pursue a Doctorate degree simultaneously to further increase my management competencies.

I am fortunate to have been given proper and comprehensive exposure to management roles. I have held positions which allowed me to exercise a substantial degree of autonomy. The positions which I have thus far held helped me to think critically and to make rational decisions amidst ambiguity.

While I do not have an exceptionally high GPA, my experience in the organizational setting, I believe, may compensate for this short coming. Upon graduation in 1989, I have worked for a decade in manufacturing companies, holding accounting positions. These include the positions of Cost Accountant, General Accountant, Plant Accountant, and Finance Manager. Gradually, my circle of influence has grown with increasing responsibility.

There have been no significant changes in terms of the technical requirements of these roles. The increasing responsibility came with the need to manage people, which is more of a challenge than the technical aspect of these jobs. I take pride in saying that while I have not been academically exceptional, I have been effective at performing these roles, being both results driven and yet to have enough focus on people management.

Thus far, the position of Finance Manager have been the most challenging role I have performed so far. Whereas before I was only expected to deliver daily management plans or short-term objectives, this role has necessitated strategic and “big picture” thinking. In this role, I have also been required to manage people, and have realized that it it important for them to realize how their objectives are meaningfully linked to overall organizational goals. Recognizing the importance of one’s contribution has been an effective motivator.

The intangible factors of autonomy, relationship with superior, and engagement cause people to be results-driven and constantly motivated. The people management component of the role has helped me keep a more balanced perspective or focus on work vis-à-vis people, and initiatives may be cleverly drafted so that one component complements the other.

In resolving to apply in the program, I have been convinced that it is critical to my personal development and learning, and may also be key to progress in my career. In entering the program, I expect my technical and management skills to be developed further. For problem solving, I want to be able to break down problems and see patterns or basic relationships or connections among them. Moreover, I want to be able to utilize several analytic or creative ways to break apart complex issues into component problems and to evaluate the identified alternative solutions to problem.

I would also want to be taught how to use logical, systematic reasoning to understand and resolve, analyze and resolve issues. In terms of communication skills, I want to express ideas more effectively in both written and oral communication and to pick up non-verbal clues and use non-verbal information. I want to practice effective use direct, open, two-way communication and read beyond what is said and to alter my own behavior to respond appropriately.

Information management is also one of the areas which I want to develop. I want to be able to compare, recognize and correct discrepancies with multiples sets of data to balance records and to utilize monitoring systems to ensure achievement of goals of individuals in the organization I work for. I also want to be taught the rigor of verifying or uncovering additional information for accuracy. I also want to be more effective at collaborating with others. I want to build good relationships with people within and outside of the organization to identify or resolve differences, issues and obstacles.

All these soft skills, together with the technical content that shall be imparted in the program will help me become a more effective professional. I am thoroughly convinced that to progress in one’s profession, there must be continuous passion for learning – both academically and through practical applications. The learning not only comes with solid academic content but also equips one with the soft skills needed to advance in one’s career. This realization of the value of learning upon application to the program in itself is valuable.

I have changed my perspective of learning as a tedious process, to one in which I could be actively engaged, and to even have fun. I really appreciate what the program has to offer, and its promise of helping me advance both my personal and professional career.

I also expect the program to espouse an atmosphere of learning where students can be inquisitive. That is, where questions and further inquiry are encouraged. Moreover, I hope that the teachers of the program may be prudent in knowing when to handhold a student and when to let him work independently. There may be some subjects which I will find difficult and in which I expect more help from my Executive MBA mentors.


Free Essays

Lost Horizon

Lost Horizon is a utopian fantasy novel, and so the reader must use his/her imagination to help make this unusual world (Shangri-La) believable. It is more cerebral than that According to Steven Silver Reviews on the novel, the monks at Shangri-La believe in a philosophy which is a mix of Christianity and is brought to the valley by the 18th French priest Perrault which is also the name of the French fabulist and the Buddhism which existed before Perrault’s arrival. The motto of these monks could best be summed up as “Everything in moderation, even moderation”, same as what Aristotle believed in his idealism.

The novel opens in a gentleman’s club in Berlin where four Englishmen have met for the evening. Talk turns to a plane hi-jacking which had occurred in Baskul, India the previous year. When the men realize they all knew one of the kidnap victims, Hugh Conway, the conversation briefly touches on his probable fate. After the group breaks up, one of their number, the author Rutherford, confides to another that he has seen Conway since the kidnapping and goes on to provide a manuscript accounting for Conway’s experiences.

Conway is among four kidnap victims, the others being Mallinson, his young assistant who is anxious to get back to civilization, Barnard, a brash American, and Miss Brinklow, an evangelist. Conway himself rounds out the group as an established diplomat and stoic. When the plane crashes in the Kuen-Lun Mountains, the quartet is rescued and taken to the hidden lamasery of Shangri-La. Conway is the most adaptable and open-minded character in the book and takes what people say at face value as truth.

Conway, Malinson, Barnard, and Ms. Brinklow are four passengers catching a flight out of Baskul as the political and military situation there deteriorates. The plane is being flown by a pilot who appears to be in a trance and taking them drastically off course. A forced landing on a Himilayan mountain top kills the pilot and ruins the plane. The four survivors are rescued and brought to a strange, almost magical, mountain monastery and village. The setting is lush and green despite the altitude.

The people placid and friendly, but mysteriously quiet about the prospects for returning to civilization, so remote is the village. Despite his knowledge Conway leaves with Malinson in an attempt to reach India on foot. They are deceived and the journey is a tragic one. Conway managed to reach civilization and then is desperate to leave to make his return back to Shangri-La, to accept his position as successor to the deceased High Lama.

Basically, the story is a spiritual journey for those who see what it is they have stumbled upon, Shangri-La: paradise on Earth. Conway is given an audience with the High Lama but remains quiet as to what is going on. People age years instead of decades, there is no crime or war or hunger.

The novel teaches us that desire itself corrupts mankind. Buddhism teaches that nirvana is the end of desire for anything at all, even life itself. Hilton takes this idea and uses it to create his utopia. In Shangri-La, no one wants anything because everyone has everything they need. Children are indoctrinated in courtesy and etiquette even when they are still very young. They are taught to share and love. If two men desire the same woman, one is willing to let go. Passion and ambition are not good.

The basis of all human emotion is desire, and when all desire is eliminated, you achieve a utopia. People in Shangri-La do not “do” anything because they do not want anything. They read, listen to music, have discussions and share nature walks, but they do not compete with each other or perform work. Hilton’s utopians live abnormally long lives because they do not experience any tension or yearnings.


Hilton, James (1988). Lost Horizon. Mass Market Paperback. ISBN: 0671664271



Free Essays

Linking benefit and pay and to competitive advantage

For companies to be able to give their best and produce high quality goods and services they require to have a work force which is of high productive, their productivity is mostly based on some few aspect such a pay and benefit and competitive advantages. As companies/firm face still competition to control the market some management of these companies are coming up with ideas to please their employee and accommodate them in their firm. All firms require these three things. Some have attractive benefits others are reassessing their offers some package are fund education, elderly care , health care for employee family, offer transport for their employee, rewarding the most productive employee and providing houses for their employees.

Fund education

Some companies encourage their employee to further their studies and climb up the ladder in the company. This is done in order to increase employee experience in what he/she handle in the company. It’s also done in order to increase the productiveness of a employee.

Elderly care

As most companies face stiff competition service and good, some firms are starting a package to cater for their employee who have since retired and are in their late ages. This is done in order for an employee to be bale to concentrate on his duties and give their best in that company. Company which offer these services tends mostly to out d other s who do not have such kind of services in their operation.

Health care for their immediate family

Where an employee is required to leave his place of work and go to take his immediate member of family to a hospital, some companies are cutting this wastage of time by introducing health care services to their employee not only saves time the service will also save the employee money as he/she does not need to spend anything in the hospital as his company will settle the bills.

Offer transport for their employee

Firm will buy buses which are used to ferry their employee from their residence to their place of work this is done in order to be bale to save to time which they could have used to go and look for other means of transport and thus reporting to work late or already exhausted and thus been unable to produce more for the company. In some firm every employee is dropped at his/her door and thus save companies and also employee time.

Rewarding the most productive employee

In most firms an employee who produces more in the firm is mostly rewarded by the management this is done in such away that the productiveness of employee is perused, where by a firm provide a questioner where every employee fills the questioner with the guidance of the management.

Providing houses to employee

In area where the employee comes from a far distance the firm provide houses for their employee where the employer do not want their employee to waste time they are provided with a house where they resides together with their family. It’s also done in order for a company to be able to know that their employees are safe.


Companies which have the above described services to their employee tend to have high production and do better than other who does not have any benefit /competitive advantage.

Messer. M (2006) Benefits: Gian a competitive edge with offerings employers want strategic finance 88.no5, 8, and 10

Competition for experienced accounting and finance professional increase organization are looking for ways to give themselves an edge way top help, a worker achieve a better work life balance this is by making the worker comfortableness in his work and also in his life among the benefits is over time work and companies that offer facilities such as health care or similar effort demonstrate commitment to personal to their employees.

They use various ways such as sharpening the skills of the employee,

Sharpening of skill

This is done by the company sending employee to school to increase their skill in the company. This effect is felt by the company in their production. Incase where an employee is kept comfortable by the company he tends to produce more in turn of return. A company input can determine the employee out put this is determined oh how committed is the company to its employees. Company and employee vary widely. In order for a company to perform effectively its must know who to hire, retain nature and develop its employees.

The trouble is the employee effective studies show that the best and the academically brightest are more likely to leave a firm. This is the best are mostly not comfortable either by the working condition or the workers pay and benefits and thus they are poached by other companies which have better conditio0n and benefits. A company may use the benefits to increase its employee morale and retaining and attracting employees it can also use benefits to keep employee attitude and increase their performance. Such benefit includes career growth or a mentor in a firm.

Career growth

This is whereby the company can take its employee to school in order for them to acquire new skill for the company. This makes the employee to feel that the company owns them and thus give all the best to the company. What is important in any company is the employee and their status a important factor any company to keep its clients and its business knowing its attached into it .its capability to recruit, retain and develop its employees.

In most countries in the third world many workforces will join many companies with a view of giving their best into the company will be determined by company interest in strengthening and restructuring the employee profession. Those different employees will look different in most companies, some will be challenged by the rumination given by the company and advance their career with the aim of crimping the ladder and also for a better pay. Some will not work with the referenced company for long due to been unable to adapt to the company, other will go to better paying companies, provide better working condition have good package.

Many employee do not take a company as a place to work for over five years they gauge their stray on some aspect its understood that many employee in the country are more likely to leave seeking better working condition and other rumination.

In some companies they have developed ways of tapping the promising employee by promoting him over the ladder, they also encourage them to go to school and advance their career in order for them to climb the ladder of promotion and get better pay thus encouraging them to work with the said company. Companies should at least look into employees policies under which they work.

Schwartz B,R,Wurtzel J, Olson L ; attracting and retaining teachers organization for a economic cooperation and development. The OECD Observer no261.27-28

In each and every company all workers rigorous requires some readiness. In order for them to be able to produce for the company this means they have to asses the work of the company what is expected of them and their aims/goals.


For example some company creates a week in the company calendar for rigorous training and also introduction. This enables the employee to be able to produce what is expected of him. It also expects to minimize time loss in the company. To develop a company to be able to produce more and have effective employees a company is supposed to match the productiveness of an employee. In some company they provide a questioner which every new and old employee fills, it offer each week this is aimed at direct correspondence between the directors and employee. In order one to known the weakness and strong ness of an employee. Its coordinated in such a way that the directors reads the questionnaire and when they note there is laxness in one employee a special team is there to assist him.

Some firm share workshop with other firm this is to ensure that an employee can learn from the other employee of another firm other organization organize for departmental workshop this sharpens an employee and also he /she get to understand what he does not understand . This is aimed at putting them with the high performing employee and low performing employee to effective knowledge.

One common thing is that good employee is an advantage to the company in which a company can be able to produce more and employee can learn from one another. Supporting and retaining employee’s makes them feel that they are part of that company thus they work with all their strength knowing that they will be in that company for a long period. In each and every form when making a policies one should address pay and potential for company /sector growth.

In many countries most in third world country worker5 policies are becoming a bit tough to the worker and many people are resulting for self- employment a company should come up with way to reward the employee i.e. by paying more for one who produce more. This is linking pay and benefit to competitive advantage.

T. H Koen,Wang C,J.2005 Benefits  offer an advantage a firm productivity ?an empirical examination personnel review 34:no4.,393,512


This is explaining or suggesting that employee benefits have a moderate effect on firm productivity, irrespective of industry or firm size.













Free Essays


I have already uploaded our family pictures on our new Website. Practically took the time segregating and scanning the images by page and by year. I was also thinking about your move to run as Governor while browsing the site. There are good things and bad things associated with its duties and responsibilities but I firmly feel in my heart that you can overcome all the bad things that come with the position especially during the campaign. I have reared you to be a brave man of honor. Run as you see fit and serve your country, your countrymen and our God well.

Always remember to practice accountability. Make it your personal policy to keep a detailed statement of your expenditures. When your separate accounting software is ready I can guarantee you my full support in tracking and monitoring expenditures, people and results. You need to personally check the flow of your transactions, money and the results to avoid sabotage. Keep your antennae out for information to safeguard your integrity in carrying out public duties. It is always a good thing to be transparent and honest. Treat your friends and your opponents with tact and respect. Always perform deliberate acts of kindness.

Loyalty is never paid. Loyalty is being given out of deep respect for you as a person, of your vision and hard works. Never rely on loyalty that does not last long. You do not aspire to win for fame. Your goal is to win to help people. Ask respected higher ups for counsel periodically and spend time alone to think before you make any decision.

A council is good but you are to pray for guidance from the most High One alone. God shall lead you as to how to perform your duties and how to help your people. Your basic strategy is to aim to do good, serve with compassion and do your works with passion. Make sure everyone knows you did the work by maintaining press releases, emails to higher ups and newsletters from your office. People have the right to be informed of how things are being run and you have every right to claim the good works that you have done.

We are not to be silent with politics attacks on good works. But you are to be silent on politics attacks and smear campaigns on personal issues. We want to let you know that we can be silent with all the anticipated negative campaigns directed to us and to you. A man who damages the reputation of another man is a man that cannot be trusted. Remember my son to be careful not to do that in your political campaign no matter how tempting. Always be transparent and deal with the issues in an objective way. You are a man, be always a man. Friends come and go so choose well.

Listen with your heart and not your ears. Choose the ones that will serve you with great dedication and loyalty. Real friendships are hard to find. Feel their honesty and seek for their commitment through good works. The most effective way to conquer the hearts of your people and conquer the respect of your opponents is by beating your opponents through good works.

You are an open target to an open world. You are to protect yourself and your people as long as you can. You have your mission from God, you have work to do and we’ll always be here to wait for you to come home when you fail and feel like life seems to tumble down to keep you company. I will not ask any questions for any failure you may encounter. I am your mother who will always keep you in my heart and love you forever as my child. God speed my son. Do what you have to do for the love of God.

Loving you always,

Your mother

Free Essays

Nowadays corporate governance

Nowadays corporate governance is seen as the key of attracting investors. Capital flow seems directed towards the companies, which practice fair and transparent ways of governing their organizations. With the changing global business scenario the need of understanding and effective practice of fair and technologically advance corporate governance has also increased. In my speech I will first explain the notion of Corporate Governance.

ICAEW (2002) has explained corporate governance in a very effective and comprehensive manner as “ Corporate governance is commonly referred to as a system by which organizations are directed and controlled. It is the process by which company objectives are established, achieved and monitored. Corporate governance is concerned with the relationships and responsibilities between the board, management, shareholders and other relevant stakeholders within a legal and regulatory framework.”

Sir Adrian Cadbury (1992) defined corporate governance as ‘the whole system of controls, both financial and otherwise, by which a company is directed and controlled’.

There are no hard and fast rules for corporate governance, which can be prescribed for all the countries. These rules can be different for different countries according to their needs and cultural settings. According to ICAEW (2002) with all the contrasts present in the rules and regulations of different countries emphasis is given to generic corporate governance principles of responsibility, accountability, transparency and fairness.

Responsibility of directors who approve the strategic direction of the organization within a framework of prudent controls and who employ, monitor and reward management.

Accountability of the board to shareholders who have the right to receive information on the financial stewardship of their investment and exercise power to reward or remove the directors entrusted to run the company.

Transparency of clear information with which meaningful analysis of a company and its actions can be made. The disclosure of financial and operational information and internal processes of management oversight and control enable outsiders to understand the organization.

Fairness that all shareholders are treated equally and have the opportunity for redress for violation of their rights. According to Meigs et al. (1999) this information meets the needs of users of the information-investors. Creditors, managers, and so on-and support many kinds of financial decision performance evaluation and capital allocation, among others. (P.07)

Corporations resolutely focus on maximizing profits and a ‘legal obligation to act in the best interests of their shareholders. By and large, this excludes acting ethically or socially responsibly…’(Slapper and Tombs, 1999).

(Shah, 2002) states that some Trans-national corporations make more in sales than the GDPs (Gross Domestic Product) of many countries. In fact, of the 100 hundred wealthiest bodies, 51 percent are owned by corporations. While this can be seen as a success story from some viewpoints, others suggest that these and other large corporations are largely unaccountable for the many social and environmental problems that they leave in their wake, and that their size means that their effects are considerable.

It is not that every single corporation is inherently bad or greedy, but commonly, the very large, multinational corporations who naturally have vested interests in international development and trade policies (like any group) are able to deploy enormous financial resources in an attempt to get favorable outcomes. The political power that is therefore held by such a small number of people impacts the planet significantly. As a result a few of these corporations make up some of the most influential sources of political and economic power.

Naturally, with such influence it is not clear  ‘who’ the regulator is. And as Clarkson’s (1999) earlier quote suggests money and power, in corporate activity, are paired. And where profit supersedes safety and power supersedes regulation there stands the conflict of interests, for the victims of corporate crime. These are for the most part neither wealthy nor powerful although, when they are liability is certainly applied copiously.

For example in the case of Enron the former chief accounting officer, Richard Causey was indicted on charges of ‘ fraud, conspiracy, insider trading, lying to auditors and money laundering for allegedly knowing about or participating in a series of schemes to fool investors into believing Enron was financially healthy’ ( The ‘victims’ in this case were the investors who were identifiable and influential.

Violations, which impact on financial systems, are subject to more scrupulous legislative administration, compared with social infringements (snider 1991 cited in Slapper and Tombs 1999:89). Increased attention to corporate crime would mean relating to large companies as ‘criminals’ (Slapper and Tombs, 1999). An issue, (Sullivan, 1995 cited in Clarkson, 1998) renders impossible on the basis that ‘crimes can only be committed by human, moral agents’.

Media attention will focus on financial aspects of corporate crime due to its impact on a political scale and the sensational-factor that is the ‘respectable’ figures committing crime as well a the belief/knowledge that ‘scandal sells’. Scandal, is common reference for this financial aspect but noting the influence of language Slapper and Tombs (1999) note that this sets a’ scale’ for perceptions, rendering it uncommon/unusual. Another scale, which has been set in the last few decades, is the increasing complains of the least risk disclosure by the companies in their annual reports and financial statements. This is also accompanied by the misuse of the accounting techniques by the executive officers and managers of the corporations. As in case of Enron the technique of off balance sheet reporting was used in negative manner.

Investors are often aware of the risks they take and in itself, off-balance-sheet financing is no vice. Companies can use it in perfectly legitimate ways that carry little risk to shareholders. The trouble is that while more companies are relying on off-balance-sheet methods to finance their operations, investors are usually unaware that a company with a clean balance sheet may be loaded with debt — until it is too late. (Morgenson, 2001)

A change is required in the regulations. The accounting firm should not perform the consulting and auditing services both. The Companies should be required by the Government to increase their degrees of disclosure. The top-level management should be held more responsible by tightening up the regulations. They should also be held responsible in case of any frauds and regulatory violations of their subordinates. This in turn will give rise to the sense of responsibility in the people related at all levels. (Hanson, 2002)


Cadbury Sir Adrian, (1992). Report of the Committee on the Financial Aspects of Corporate Governance, Gee & Co Ltd., UK

Clarkson, Max (Editor), The Corporation and Its Stakeholders: Classic and Contemporary Readings, University of Toronto Press, 1998.

ICAEW, (2002). What is Corporate Governance? Institute of  Chartered Accountants in England and Wales, Retrieved 30/10/2007 from <,MNXI_78822>

Hanson, K., (2002). Lessons from the Enron Scandal, interview about Enron by Atsushi Nakayama, a reporter for the Japanese newspaper Nikkei, March 5, 2002, Retrieved 30/10/2007 from

ICAEW, (2002). Corporate governance developments in the UK, Institute of    Chartered Accountants in England and Wales, Retrieved 30/10/2007 from <|MNXI_78921&route=11295|P|47492|47496|78921>

Meigs, Robert F., Williams, Jan, R., Haka, Susan F. & Bettner, Mark S., (1999). Accounting: The Basis for Business Decisions, Eleventh Edition, Irwin Mc Graw-Hill, p. 07

Moregenson, G., (2001). Are New Woes Lurking in Financial Nether World? The Associated Press, December 23, 2001, Retrieved 30/10/2007 from

Slapper, G.,  & Tombs, S., Longman, (1999). Getting Away with Murder, Corporate Crime, Reviewed by Chris Moore, Issue 47, May 2000

Shah, A., (2002). Corporations and the Environment, Page Last Updated Saturday, May 25, 2002, Retrieved 30/10/2007 from <>






Free Essays

Non-Accounting Majors

Various accounting principles plays vital role in the success of efficient management of inventories of any companies. Inventories are important aspect of the company since it is the one the determines the available raw materials for the production of the organization, or it could be that it determine the available stocks of the company on their warehouses to be distributed to the market (Robertson, 1998). So much with the importance of inventory management, let us now pay more attention on the importance of accounting to inventory management.

Well, the idea of check and balance of accounting could be used by managers assigned in inventory management. Inventories must be checked every now and then depending on the need of the company, the demand and supplies of raw materials must be on balance in order not to affect the operation of the business. Moreover, inventory managers having knowledge in accounting would enables them to determine the allowable level of ending inventories by the end of every period so as to make the financial condition as well as the assets to be stable.

There are also times that there are inventories that are non-taxable, therefore, the inventory manager must know how to present those non-taxable inventories to the accountant of the company. The inventory manager should know this kind of principles in order not for the company to pay too much tax and for the smooth flow of data transfer from one department to another since the inventory manager has to identify first those non-taxable inventories before presenting the report to the accounting division. With this, even simply knowledge in accounting would give companies chances of working things smoothly.

I am not saying that inventory managers have to acquire accounting studies as well. But the mere basic principles of accounting would be just enough for us to perform our responsibilities well and to avoid committing mistakes as to the proper ways of presenting the needed data of various departments of the organization.


Robertson, L. (1998). Managing Inventory [Electronic Version], 1. Retrieved 9-20-07 from



Free Essays

Program Evaluation for Non-Profit Organization

An organization needs to put in place an evaluation process to ascertain whether it is accomplishing its goals or not. Such evaluation would then become a very important part of the ensuing planning process. There are two ways in which an organization conducts an evaluation. One is intended to proceed with the evaluation through the goals established by the organization. The other is to conduct the evaluation through the processes in place in the organization.

With goal-based evaluation, the organization seeks to understand whether the avowed goals have been achieved or exceeded. It has an emphasis on outputs instead of processes. Even with limited resources and difficult situations, the goal-based evaluation looks at the outputs based on the inputs and other raw materials put into the process. It is usually useful for organizations that are beating deadlines, or seeking to meet targets given limited resources, time, and manpower. Results are given primacy in this kind of evaluation (Edvardsson & Hansson, 2003).

Process-based evaluation focuses on efficiency and effectiveness. It is geared towards minimizing costs while ensuring that the goals are achieved. With this kind of evaluation, the goals to be achieved are given and are expected to be delivered. In doing so, the organization is freed from looking at the achievement of the goals because such is expected. What the organization is focusing on, however, is the way that the goals are being achieved.

Are they effective and efficient? Are they contributing to the overall objectives of the organization? Is there a way that such processes could be improved and geared to help the organization achieve more? Are the policies of the organization sound and the different departments coordinating smoothly with each other? Through these questions, the organization is taking a look at the way in which it can achieve its goals by improving its processes. The goals are important but processes are more important in certain respects because of their systemic nature. Depending on the circumstances, however, a goal-based organization may be more important than a process-oriented one (Ott, 2001).

In addition to this, process-based evaluation takes a look at the policies, programs, coordination systems, and other processes at work in the organization. It makes use of a systemic view of the organization and seeks to integrate every important aspect of the organization in the evaluation process. It is more comprehensive than goal-based evaluation as it may take more time to be completed (Ott, 2001).

Application of Evaluation Styles

Goal-based evaluation may be more appropriate in situations where the non-profit organization is evaluating together with their clientele. In the case of an organization dedicated to community development, a goal-based evaluation would be suitable for a discussion with the community regarding the achievements of the goals. Usually, if the goals are not accomplished or achieved, the people, together with the non-profit organization can brainstorm on the problems that are being faced by the community.

In addition to this, it would be important to evaluate themselves about the hindrances that they face in accomplishing the goals identified during the planning phase. Goal-based evaluation also looks at the actual outputs of the organization’s project. If the project is about reducing the number of substance addicts in the neighborhood, then a goal-based evaluation would say that the program is successful if there is a significant decline in the number of offenders.

On the other hand, process-based evaluation would take a look at the overall systemic performance of the organization. Even if the results are phenomenal if the processes are not firmly in place, then such an evaluation would be careful in proclaiming success. It would look at the coordination systems, the teamwork of the organization, as well as the ethical side of things. With such an evaluation, it becomes important to look at the overall strategy of the organization instead of simply focusing on achieved goals (Ott, 2001).

Establishing the Framework of a New Nonprofit Organization

As a new Executive Director of a nonprofit organization, there are several things I need to do in order to ensure that the organization is setup and would thrive in the process. Without the necessary legal and financial framework, the nonprofit organization is bound to fail. The following strategies outline what needs to be done for this organization.

The first step, of course, would be to define what the organization is all about—the kinds of services to be offered and the way it will be structured. The vision, mission, and goals of the organization have to be defined. The structure, on the other hand, would enable the organization to achieve its goals.

Registration and Legal Personality

The nonprofit organization should acquire its legal personality by being registered with the Securities and Exchange Commission or its equivalent. Through this, the nonprofit organization will be able to transact legally under the laws of the country and will be able to purchase property and open accounts under its own name. This also prevents unscrupulous persons to setup accounts and secure properties in their own names at the expense of the organization. With a legal personality, however, also comes responsibility. As such, the organization may sue persons and it can also be sued. It therefore needs to comply with legal requirements of organizations.

Securing Advisers

The nonprofit organization also needs legal and financial advisers so that it would not violate any law or ordinance even accidentally. A legal counsel would be needed. Although there are lawyers offering pro-bono services, it would also be a good idea to include the lawyer’s fee in the budget of the organization.

Securing Funding

As part of the strategy of the organization, the Executive director also needs to look for sources of funding from different organizations. Private corporations and even countries do fund initiatives for development. It takes a careful research of these organizations. Without a steady source of funding, the organization will not prosper and will only flounder if there is no steady funding.

As part of the financial framework of the organization, there should also be a means to ensure transparency and accountability. This would be important in ensuring that the donors trust the organization and for the organization to adhere to governmental rules such as Sarbanes-Oxley. Although SOX, as Sarbanes-Oxley is called, was meant for companies for profit, it has provisions for non-profit organizations. Adhering to these accounting regulations can also help in enhancing the overall strategy, integrity, and transparency of the organization.


Edvardsson, K. & Hansson, S. O. (2003). When is a goal rational?. Social Choice and Welfare, 24 (2), 343-361.

Ott, J. S. (2001). The Nature of the Nonprofit Sector. New York: Westview Press.



Free Essays

Becker’s Rational Theory

Gary Becker is both a sociologist and economist although he won the Nobel Peace Prize in 1992 for his rational theory for economics.  The lecture he gave for the Nobel was divided into six points: his economic approach to life, his view of the discrimination against minorities, his theories on crime and punishment, his understanding of human capital, his perspectives on family ties and how he believes people will accept the theories he had proposed. Becker’s ideas are refreshing, if not altogether new and worth understanding.

First of all, he distinguishes his analysis from the Marxian perspective.  He explained that the communist concept is purely based on utilitarian terms while his concept of rationality is a method of analysis and not an “assumption about particular motivations.” (38) His approach is founded on the idea that time has its own cost.  He argues that many human developments have been made to extend life expectancy but no one can alter the pace of time from twenty-four hours to another pattern.  Thus, time has its cost and also affects the choices that people make because of its price.

Becker takes hiring of workers and discrimination into a new light with his idea that the employers may usually be the source of discrimination but in truth, the employees and customers of a company also contribute to the decisions being done on employment. He cites that some workers refuse to be assigned under a woman and certain clients may prefer to deal with white instead of black sales agents.

One of his theories on discrimination is that when the quantity of the majority of a prejudicial relationship is greatly higher, the income of the mentioned party will be much higher while those of the minority group will be very limited.  However, Becker also believes that if the prejudicial group is smaller in quantity compared to the group they have chosen to outcast, then the prejudice will be harmful to the prejudicial people.

Becker also controversially cites that the popularized beliefs of employers, teachers and other persons of influence on the community can create stereotypes that are harmful or counter-productive.  He bases his assumptions on the premise that education is an investment because previous studies show that putting more time and money in getting academic training boosts a person’s chances to become economically successful. Stereotyping people causes these minorities to lessen their educational investments both academically and career-wise.  This makes them less productive to society. It is worthy to note that Becker highly believes that education is a very good investment for the economy and that learning can be hindered by prejudice.

Another institution Becker chose to analyze is society’s view on crime and punishment.  Becker sought to explain that crimes like stealing may not seem to cost the society very much but criminals also invest on weaponry and premeditated planning which could have been put to better communal use.The Nobel winner explained that in the mid-twentieth century, crimes were viewed as originating from mental illness and social oppression to the point that criminals were made to look like victims of society.

These, therefore, affected social policies by giving criminals more rights, reducing the chances of apprehending and convicting criminals while lessening the security of the rest of the innocent. In his economic point of view, Becker believes that policies must be geared towards higher costs of punishment for criminals to deter them from making their crimes a livelihood.  He believes that to lessen crime, the economic and social environment formed by public policies (e.g. expenditures for punishments, employment opportunities, educational programs) must be taken into consideration.  If the legal jobs were paying much higher than what would have been gotten from a quick crime, then it would lessen the probability of criminal acts.

It was Becker’s ideas that have inspired Law Professor, David Friedman (1995) to propose other ways of fighting and preventing crime.  Based on the Nobel awardee’s theory, the professor suggests that instead of paying policemen regular salaries, these officers should just get what has been collected from the criminals he had apprehended and caused to be convicted.

In this scenario, the victim shall pay for the investigation of the crime to the police so that investigative jobs will be allocated well to the uniformed men. According to Friedman, this will lessen the cost of taxes that ordinary law-abiding citizens pay for protection and judicial courts. When the criminal is able to pay the damages he had brought about, then the victim and police have been paid. In this way, the policeman are not  tempted to accept bribes from criminals while the cost of implementing justice is greatly lowered.

Another point of view was given by Dr. Mark Thornton, Senior Fellow at the Ludwig von Mises Institute, this time contradictory to Becker’s.  After his winning the Nobel, Becker became a staunch believer in the legalization of drugs to lessen its harmful impact on society.  On the other end is Dr. Thornton who made a paper entitled, Harm Reduction and Sin Taxes:

Why Gary Becker is Wrong, to state his points.  According to Becker, legalizing drugs would bring in positive results if excise taxes will be created to make the price of these drugs less affordable.  However, according to Dr. Thornton, the taxes will still not eliminate the consumption of dangerous drugs but will only encourage production and consumption of more potent forms of these drugs.  Marking legal drugs as harmful will only make these even more attractive to young teens and adults.  Putting excise taxes will make the drug too costly for those who truly need it which might lead to consumers preferring a less expensive yet more harmful kind of solution and the formation of a black market.  Thornton further argues that there is no proper way to calculate the tax rate. (12) I

In Thornton’s light, he reveals that Becker’s ideas may be highly theoretical but not practical because it does not take its effects on society as critically as it should.

One subject that may give Becker a Marxian link is his use of the term “human capital.”  Although the term he uses is Marxist, he does not intend it to mean something utilitarian.  Instead, Becker chose to use the term as a name for an analysis that bases its assumptions on how individuals choose their education, career training, medical care and other additions to knowledge and health by weighing the benefits (cultural and non-financial) and costs (value of time spent on these founding investments). (43)

Becker identifies two theoretical concepts used in human capital analysis which are the general and specific training or knowledge.  Becker believes that general training is simply knowledge of how to make things work but specific training or knowledge refers to an individual’s skill in climbing up and down the authority structure of the company he or she works for and includes the talents that may be necessarily giving this employee more value to the company. With this proposition, human capital becomes an asset of a company as part of accounting principles.

He further explains human capital investment in the light of marital relationships. He believes in the idea that marriages are unions that are based on the theory that putting together two people’s resources would make them stronger economically. Thus, divorce rates are affected by the financial stability of husbands and wives.  This also explains why the rich have lower divorce rates compared to couples who are problematic in their finances. Although romantics may want to challenge this idea, the statistics will provide Becker with more evidence rather than refute his contentions.

Human capital is founded on the idea that education is an investment. Becker offers his human capital analysis to explain the gender gap in earnings of men and women.  Traditionally, women were more likely to get poorly-paid jobs because they spend time taking of children first before they can invest more attention to getting better education or training.  However, the decline of family size in the past decades, growth of divorce rates that leave single mothers to work for a living, increase in the fulfillment of job vacancies brought about by industrialization and legislation has been able to give women more opportunities for career and financial stability.

Becker believes that his rational choice way of analyzing life can also explain the formation, dissolution and structure of families. The family is the oldest and most basic of all institutions. Becker already mentions that marriage is a union that is made between individuals who believe that staying together would benefit them both. Divorce, then, would be made if the two individuals believe that economic stability would be achieved without the other.

One of the controversial principles regarding family and economics came from Malthus who believes that fertility would rise as incomes increase and would decline as incomes decrease.  This theory failed when the modern era showed that as industrialized countries were becoming super economic powers, birth rates started to dwindle. According to Becker, the only problem with the Malthusian principle is that it was not adaptable to modern life.

Modern people put great value in time and so taking care of children costs greatly. Parents also recognize that the success of their children are based on the good quality education and training they are able to get. This raises the cost of investments even more which leads to couples having fewer children. This explanation also addresses why more and more women are entering the labor force. With fewer children to tend to, women are freer to pursue their careers.

Becker also sought to analyze why there are societies wherein gender roles seem to attribute to women the child-rearing and agricultural activities compared to the men who are delegated to do the fighting and market work.  He believes that these are because of biological differences and cultural conditioning. He incorporates his human capital analysis by saying that any investment in education requires practice and that since men have more time to delve into the sporty and marketing skills, they are the ones given the gender role.  Women, on the other hand, are too busy with children to develop their own talents and skills and would do better in simply doing what else should be done to uphold the family.

Becker believes that the way one is raised has a lot of bearing on how one thinks and acts as an adult.  Choices adults make in life are based on their childhood experiences.  Therefore, the family is a very important institution in society because the preferences that are at work in his rational theory are formed when people are growing up.

Another aspect of family life Becker chose to single out was the issue of altruism.  Based on the “Rotten-Rid Theorem,” selfish individuals use altruistic behavior to ensure their own welfare. Therefore, parents and children can strive to uphold altruism within their families because of their own selfish purposes.

For example, parents who are not planning to leave bequests to their children strive to uphold love, guilt and assistance among family members to ensure their welfare once they grow old.  By imbibing values such as caring, older children are made to feel guilty when they cannot take good care of their old parents.

Parents who do not plan to leave bequests to their kids tend to strive to work or assist their children in housekeeping to compensate for their lack of financial contribution. With children who have been taught to give back something in return while they were young, the kids will be obliged to take good care of the old parents. Parents who are not planning to leave bequests can also give their children the best investment they can have – education – to ensure that when they are already old, the young ones will be able to provide for their needs. With these in mind, Becker makes a funny proposal for parents to have contracts with their children to oblige them to take care of the old couples once they are too weak to work.

With his analysis of familial relationships, Becker also realizes that social institutions like homes of the aged are contributing to the breakdown of families. With the government taking care of what could have been someone’s responsibility, the family members communicate less and become estranged from each other.

Other sources of this problem are greater geographical mobility, increased wealth due to better national economy, better capital and insurance markets that create financial endowments for these responsibilities, higher divorce rates that separate family members from each other and even health care which also takes care of things so that people can continue to work instead of taking care of each other.

Becker concludes his lecture by summarizing the main points he had so far mentioned.  He also predominates any oppositions to his claims by saying that since his concepts are based on economic or rational choices towards behavior, many critics have already raised issues about individuals not acting consistently all the time and that behaviors are not always forward-looking (especially the ones of criminals).

Becker counters these allegations also by explaining that his rational choice theory is not simply an economic approach limited to the micro level.  He believes that the theory can be a very good and powerful tool to use to understand and derive implications on the macro level. Backer believes that using assumptions about technology and other determinants of opportunities, market and non-market situations, laws, norms and traditions can help obtain better results about group behaviors.

Becker’s ideas are truly remarkable. Some are simply a review of what has been happening to society (e.g. family dissolution) while others like his view of crime and punishment are refreshing and obviously revolutionizing social policies and perspectives. His view on crime, particularly, raises many controversial questions towards practicality especially because it concerns the security of many innocent people. Controversial or not, his rational choice theory shines a new light towards how humans keep adapting to the society he is forming at every moment and this makes him worth of the Nobel Prize.

Works Cited

Becker, Gary. “The Economic Way of Looking at Life.” Nobel Lecture. 09 December 1992

Economic Sciences.(1992): 38-58.

Friedman, David. “Rational Criminals and Profit-Maximizing Police: Gary Becker’s

Contribution to the Economic Analysis of Law and Law Enforcement.” 23 March 2008.


Thornton, Mark. “Harm Reduction and Sin Taxes: Why Gary Becker is Wrong.” 23 March 2008.





Free Essays

Despite Rise in Revenues, State Budget Deficit

Despite a 14.5 per cent rise in domestic revenues and external grants extended to the Kingdom in 2007, the state budget recorded a deficit of 5.4 per cent of the gross domestic product (GDP), according to official figures released Monday.

Although the country recorded a JD502.5 million increase in domestic revenues and grants, the 2007 budget deficit stood at JD614.5 million, an increase of 1 per cent from 2006.

According to the Ministry of Finance monthly bulletin, external grants totaled JD343.4 million in 2007 compared to JD304.6 million in 2006 while domestic revenues were 14.5 per cent higher in 2007, amounting to JD3,628.1 million compared to JD3,164.4 million in 2006.

The bulletin attributed the increase in the domestic revenues to a JD338.6 million rise in tax revenues, and similar raises in non-tax revenues and repayments by JD117.6 million and JD7.5 million respectively.

The increase in tax revenues resulted mainly from a 20.1 per cent rise in sales tax equaling JD245.4 million, accounting for 72.5 per cent of the overall computed increase.

Income tax revenue also grew by 20.3 per cent, or JD83.5 million, accounting for around 24 .7 per cent of the increase generated in overall tax revenues.

Last year, repayments totaled around JD51.4 million compared to JD43.9 million in 2006, the ministry’s figures revealed.

Total expenditures rose by 17.2 per cent, JD673.8 million, during this time, raising the expenditures volume to JD4,586 million.

The rise was the result of a JD626.1 million increase in current expenses coupled with a 6 per cent increase in capital expenses equaling JD47.7 million.

The increase in current expenses was due mainly to higher defense and security spending and the rising costs of basic staples, fuel subsidies, pensions and salaries.

Interest rates on domestic and foreign loans also rose by 15.6 per cent, or JD49.5 million, the bulletin indicated.

At the end of 2007, the outstanding external public debt (government and government-guaranteed) dropped by 5.6 basis points of the GDP to around JD5,253 million, representing 46.3 per cent of the Kingdom’s GDP. In 2006, the debt totaled JD5,187 million, 51 per cent of GDP.

Higher exchange rates of international currencies against the US dollar and subsequently against the Jordanian dinar were the main reason behind the increase in the external debt volume, according to the Ministry of Finance data.

Foreign debt service on commitment basis totaled around JD618.8 million, JD405.6 million of which were principal payments and JD213.2 million were interest payments.

Monday 7 April 2008

Jordan News Agency

Prime Minister Nader Dahabi on Sunday said the government has placed its hopes in the Jordanian Company for Training and Recruitment (JCTR) to create job opportunities for young persons.

The company has the full support of the Ministry of Labour, the Jordan Armed Forces (JAF) and the private sector, the premier said.

Chairing a meeting of the JCTR’s higher committee yesterday, Dahabi stressed the importance of producing highly-skilled graduates who are competitive in the labour market.

Dahabi also instructed the Labour Ministry to analyse the situation of guest workers in the Kingdom by sector so as to determine future training programmes, the Jordan News Agency, Petra, reported.

The committee also stressed the need to provide all workers in the construction sector with social security, calling on the Ministry of Public Works and Housing and investors to hire trainees from the company for construction megaprojects in the Kingdom.

JCTR Director General Brigadier General Salah Qudah said a total of 4,000 trainees have completed military training as of early February and are already training at nine vocational centres affiliated to the Vocational Training Corporation, Petra reported.

The vocational training period is scheduled to end in May, when trainees will start receiving field experience.

JCTR, with a capital of JD100,000, is working to provide young people with training and recruitment opportunities in the field of construction in conjunction with the Labour Ministry, the JAF and the private sector.

In May 2007, His Majesty King Abdullah instructed the JAF to start recruiting unskilled civilians and train them in professions needed by the sector, which has been flourishing in the recent years with large-scale projects carried out in Amman, Aqaba and the Dead Sea.

Meanwhile, the premier on Sunday also met with President of the Burundi Senate Rufyikiri Gervais, who is heading a parliamentary delegation to the Kingdom to discuss means to enhance bilateral ties.

At the meeting, Dahabi stressed the importance of economic cooperation to increase trade volume between the two countries.

Gervais expressed his country’s appreciation for Jordan’s efforts to preserve security and stability in Burundi through peacekeeping forces, highlighting the role Jordan plays in enhancing international security and stability.

Gervais said Burundi was looking for Jordan’s support to help rebuild the country and facilitate development, noting the country is currently focusing on education, health and agriculture infrastructure.

Also yesterday, Senate President Zeid Rifai met with Gervais.

At the meeting, Rifai stressed the Kingdom’s eagerness to enhance cooperation with Burundi and African nations in various fields, particularly parliamentary cooperation.

Meanwhile, Lower House Speaker Abdul Hadi Majali received Gervais and the accompanying delegation, stressing the importance of enhancing commercial exchange and investments, especially in the field of agriculture. The officials also reviewed the developments pertaining the Palestinian issue and the situation in Iraq.

Free Essays

Evaluation on Companies’ Social Accounting

Evaluation on companies’ social accounting Executive summary This report explains the concept of “social accounting” and analyzes the execution of social accounting in the two companies Corning incorporated and AM-PM Glass Company. The analysis is based on the “good” principles of social accounting and the accordance to the global standards.

And the analysis shows that Corning’s sustainability has a better understanding and consideration about the requirement of social accounting and it makes its own evaluation system based on ISO 14001, and build up a series of standards, but the standards of EMS can not match with GRI on the completeness and concreteness. AM-PM begins well in the practicing of social accounting. But it is not that easy to do well in all aspects of the social accounting, so it has only considered four “good” principles.

While AM-PM takes both AA1000 and GRI as the evaluation standards to assess its performance, and got clear and systematic report results and good reference to its development in the future. Contents Evaluation on companies’ social accounting1 1. Introduction3 2. Definition and explanation of the concept of Social Accounting3 2. 1 Definition and development of concept3 2. 2 Reasons for producing social accounting4 2. Principles of “Good” and global standards5 3. Critical evaluation on quality of social accounting of two glass companies5 3. 1 Corning Incorporated6 3. 2 AM-PM Glass & Mirror Company8 4. Conclusion10 Reference12 1. Introduction Social accounting is a voluntary process that organizations use to account for their environmental and social impacts. There are both pros and cons telling why organizations decide to engage with this concept of social accounting.

The purpose of the report is to evaluate the two glass companies Corning and AM-PM’s social accounting according to the “good” principles and global standards of social accounting. 2. Definition and explanation of the concept of Social Accounting 2. 1 Definition and development of concept Social accounting refers to the process dealing with organizational assessment and communication of its impacts and activities on relevant issues related to ethics, society and the environment with their appropriate stakeholders (Yanovsky, 2006).

It aims to address companies’ social and environmental impacts. Social accounting is also known as social and environmental accounting, corporate social responsibility reporting, or sustainability accounting, and different individual companies usually give different titles, like in Corning, it is called corporate social responsibility report, and in AM-PM Glass & Mirror, it is called sustainability report. The concept of social accounting has got more than 40 years’ development.

Abt Associates is among the earliest social accounting practitioners, its social concerns included contribution to knowledge, environment and so on, but there is no specific definition for social accounting. In 1980s, the short book “Social Audit- A Management Tool for Co-operative Working” is the basis of the early private sector companies’ social responsibility reporting (Spreckley, 1981), and “Social responsibility reporting” is the early relative formal concept.

And in this book, an internal organizational social accounting and audit model are designed to measure individual companies’ social and environmental performance. And with the development of economy and society, the concept of social accounting also gets to a broad and deep domain, which includes the evaluation about every aspect of companies’ social and environmental impacts (Rohinson, 2001; Schwartz and Carroll, 2003). 2. 2 Reasons for producing social accounting

The reasons that individual companies develop social accounting and related reports are as follows. On the negative aspect, employees’ internal pressures in their urge of wanting to report the environmental and social impacts of the company (Crane and Matten, 2007) can make companies practice the social accounting; and external forces by government agencies, non-governmental organizations, consumers or investors as they seek the company to disclose its impacts of social accounting can also lead to the social accounting.

On the positive aspect, social accounting can help individual companies identify and utilize opportunities for cost effectiveness, introduction of profitable eco-friendly products and services, energy saving and environmental protection (Defourny and Thorbecke, 1984). Also, both current and future concerns of stakeholders forewarn companies about any possible area of conflict. Yanovsky (2006) further claimed that companies become aware of the probable risk factors that are capable of affecting their business operations, which afford the chance for companies to prepare the coping mechanism. . 3 Principles of “Good” and global standards “Good” accounts must accord a series of principles. In general, good principles of social accounting have to be inclusive, involving dialogue with stakeholders; to be complete, highlighting the key areas of the individual company’s activities; to be embedded within the organization; to be comparable, undergo external verification, and give room for continuous improvements.

These principles should take both companies own management practices and the performance measurements comparison with other companies into consideration (Montgomery and Porter, 1991). Such principles have to be incorporated within the organizational structure, be verified by external auditors and be reviewed on regular basis in order in relation to the targets of its performance and cost effective business opportunities. There are some global standards that are available for companies’ social and environmental reports.

For example, Social Accountability International produced SA8000, and it provides workplace issues standards; AccountAblility developed the AA1000S Assurance Standard; The SAN framework, which is suitable for third-sector organisations; ISO1400, which are series of international standards that deal with issues related to environmental management (Porter, et. al. 2009) and Global Reporting Initiative (GRI), which is one of the most practiced standards across the globe and is in its third generation format (G3). 3.

Critical evaluation on quality of social accounting of two glass companies This report provides a critical evaluation of two case studies of how the organizations have made use of social accounting concept. The Corning Glass and AM-PM Glass & Mirror Company will be used as examples of companies which have fully put into consideration the social accounting concept. It is a reflection of organizational values and evidence-based actions they undertake towards showing concern to their stakeholders in dealing with these issues.

The evaluation about the two companies is mainly focus on analyzing the adoption of the “good” principles and their accordance to the global standards. 3. 1 Corning Incorporated Corning is a multinational company which has about 160 years’ history. Corning is among the best social responsibilities practitioners. The history practicing social responsibilities began before World War One. The chairman James Houghton laid out Corning’s seven Corporate Values: Quality, Integrity, Performance, Leadership, Independence, Innovation, and the Individual.

Corning’s strategies are based on the attributes of collaboration, risk-taking, and long-term thinking and so on. According to Corning’s strategy and value system, the best form of corporate social responsibility is equal to “simple good business” or “enlightened self-interest” and the good business is constructed by a series of good behaviors including constant interaction with customers, local communities and government. The social accounting in Corning is named sustainability report. 3. 1. 1 The adoption of “good” principles

First, Corning emphasizes the care and feeding of its major stakeholders, especially the care and feeding for its customers and employees, according to Houghton’s speech in 2004’s company strategy conference. Corning clearly obeys its seven values and takes a set of stakeholders into consideration. It puts attention to labor, women and minorities. Since 1970s, Corning began made efforts to employee women and minorities (Graham, 2010). Second, Corning has complete consideration on social accounting, and highlights impacts of the company’s producing activities to the society and environment.

Corning put attention to working conditions, products safety and efficacy, and the environment. According to Corning’s sustainability report, the central elements of the companies’ operation excellence are protection safety, health and environment (Graham, 2010). Specifically, in order to protect the air, Corning produces ceramic substrates for catalytic converters and tries to eliminating hazardous chemical materials. Third, Corning has a continuously improvement in practicing the social responsibility. Since 1970 to now, Corning consistently shows its care to its stakeholders and the environment.

The recent sustainability report is also planed for a long period, and forms a completed environmental protection system, which is including mission, vision, strategy and specific action plans. In process of the energy management, Corning track and measure its greenhouse gas emission, and conducts its related inventory, also, corning launched a global energy management program to guarantee the energy productivity and environmental negative influence. Fourth, Corning has got verification from external organization.

Corning reports its previous greenhouse gas emission and got the Registry from California Climate Action and the Registry can give a consistent supervision on the continuous execution of the environmental protection and energy management. Fifth, Corning emphasize find the potential improvement, especially those related to performance targets, cost-saving and profitable business opportunities. Corning commits to maintain a long period view of energy and the advanced view require its facilities to utilize energy in a cost-effective and environmentally responsible way.

Sixth, corning has embedded professionals related to the social accounting in the process key to success. Corning’s approach embeds an environmental, health and safety professional in the designing group. This embedibility enhance the safety and facilitate the health management system in Corning. 3. 1. 2 Accordance to the global standards In the year of 2004, Corning developed and deployed an Environmental Management System, short for EMS, whose format and substance follows ISO 14001(Corning Environmental Health & Saftey Brochure, 2007).

ISO 14001 is a very series of recognized global standards, and it affords clear and specific requirement for the corporate environmental control group in Corning. Corning facilities have gained many benefits through instituting and adopting the management systems, and due to the rigorous execution, the bad influence to the environment has been reduced. Corning has a pyramid system about EMS, the ISO 14001 stands in the center of the pyramid. And the pyramid shows clear the social accounting procedures. 3. 2 AM-PM Glass & Mirror Company

AM-PM Glass & Mirror is a residential and commercial glass company that provides exceptional craftsmanship, unsurpassed satisfaction to their customers and gives prompt service through their sustainable innovation and social accounting concept. The company recently outlined its values and objectives in the annual sustainability report, which encompass support to community trade of glass products and its internal judgments on environmental and social performance in relation to achieving its objectives (AM-PM, 2012). 3. 2. 1 The adoption of “good” principles

AM-PM Glass & Mirror Company follows the three principles of completeness, materiality and responsiveness. First, AM-PM’s sustainability report relates to complete contents of the social responsibilities. It has put attention to both inside and outside of the organization, for example the employee relationships, the sexual and racial ratio, the consideration of the disabled people inside of the organization; and the communication with communities, the campaigns to protect environment outside of the organization. Second, AM-PM’s emphasize the materiality of the action.

It stresses that social responsibilities should not only be written in the sustainability report, it must be based on specific actions first, the real practice result and data of the protection, but not only the plans in the report. Third, responsiveness is the main part that is stressed in the report, it means that AM-PM not only like to be the pioneer in the practice of environmental protection, but also would like follow other companies’ environmental steps. Forth, the values reported in the sustainability report have been externally verified by auditors and a panel of stakeholders.

The customers, employees and the communities all give positive comments on the values and actions of AM-PM. 3. 1. 2 Accordance to the global standards AM-PM Glass & Mirror values follow the AA1000 standards of assurance. And its three principles are from these standards. Also, the company values are compliant with the Global Reporting Initiative (GRI) Level A guidelines. And the third generation version of GRI gives a series of very clear standards for AM-PM to evaluate its performance comprehensively, which is with respect to specific assessment according laws, codes, norms, and voluntary initiatives.

Specifically speaking, the compilation of AM-PM Glass & Mirror Company report was based on covering all the company activities that is vital as far as environmental and social impacts are concerned (AM-PM, 2012). Its social accounting also responds to issues that arise out of its previous reports. The wholesomeness of this report is also realized in that it covers all the areas that the company operates on as required by global reporting initiative which covers the company management approaches, overall company profile, and the categories for measuring performance. . Conclusion In summary, it can be deduced that social accounting is a voluntary process that organizations use to account for their environmental and social impacts. Both pros and cons exist why organizations decide to engage with this concept of social accounting. The analysis of Corning Glass Company and AM-PM Glass & Mirror gives a specific evaluation about their execution of social responsibilities. The result shows that the two organizations both have embraced the concept of social accounting.

Corning incorporated is a big multinational which has long history of practicing social responsibility, and it has enough experiences to evaluate what kinds of actions would do well to both the company and the environment, and afford benefits to all the shareholders. So in the adoption of “good” principles, Corning’s sustainability report shows that it has a better understanding and consideration about the requirement of social accounting. In the accordance to the global standards, Corning makes its own evaluation system based on ISO 14001, and build up a series of standards.

Corning has not used GRI as its standards to evaluate performance. To some extent, the standards of EMS can not match with GRI on the completeness and concreteness. AM-PM is also a glass company that has short history. It enters the glass industry in a new age that stresses environmental protection and the full communication with shareholders. So, it begins well in the practicing of social accounting. But to a new company, it is not that easy to do well in all aspects of the social accounting, so it has only considered four “good” principles.

While AM-PM did well in the accordance to the global standards, it takes both AA1000 and GRI as the evaluation standards to assess its performance, and got clear and systematic report results and good reference to its development in the future. Reference 1. Spreckley, F. (1981). Social Audit: A Management Tool for Co-operative Working. Wales: Beechwood College. 2. Rohinson, S. et al. (2001). “Updating and Estimating a Social Accounting Matrix Using Cross Entropy Methods”. Economic Systems Research. Vol. 13, No1:47-64. 3. Schwartz, M. S. , Carroll, A. B. (2003). Corporate Social Responsibility: A Three-Domain Approach”. Business Ethics Quarterly. Vol. 13, No. 4:503-530 4. Defourny, J. , and Thorbecke, E. (1984). “Structural Path Analysis and Multiplier Decomposition within a Social Accounting Matrix Framework”. The Economic Journey. Vol. 94, No 373:111-136 5. Graham, M. B. W (2010). “Corporate Responsibility at Corning. Incorporated”. History of Corporate Responsibility Project. No. 7 6. Crane, A. , and Matten, D. (2009). Business Ethics. New York: Oxford University Press, p. 9-286. 7. Montgomery, C. A. , and Porter, M. A. 1991). Strategy: Seeking and Securing Competitive Advantage. New York: Harvard Business Press. 8. Porter, M. E. , Kramer, M. R. , and Zadek, S. (2009). Corporate Social Responsibility (HBR Article Collection). New York: Harvard Business Press. 9. Yanovsky, M. (2006). Accounting Systems. London: Transaction Publishers. 10. Corning Environmental Health & Saftey Brochure, 2007. Available at http://www. socialfunds. com/csr/reports/Corning_Incorporated_2007_EHS. pdf [Accessed 10th JUNE 2012]. 11. AM-PM. , 2012. Available at http://www. ampmglass. com/ [Accessed 10th March 2012].

Free Essays

Users of Accounting Information

Name: – Nilashish Ghosh Dastidar (Roll No. – 8) Class: – PGDRM (2012-14) ASSIGNMENT: – BRIEFLY STATE THE USERS OF ACCOUNTING INFORMATION. Accounting Information provides quantitative and qualitative information about the various transactions and events of an accounting entity. The Accounting Information system of the accounting entity captures quantitative data and processes the pecuniary transactions related to the functioning of the same.

Contemporary systems like ERP also encompasses in its scope the traditional quantitative Accounting Information besides some qualitative or non-financial information like customer satisfaction quotients, employee satisfaction quotients and product or service quality. Accounting Information is utilized for “predicting”, “comparing” and “evaluating” the earning power and financial health of the said entity by a set of users. Today, all types of organizations, from manufacturing behemoths like Tata Steel, Reliance Industries Limited etc. o Small & Medium Enterprises have need for Accounting Information. Every sector of the economy, from Manufacturing to Service to Retail and even Non-Profit organizations like NGOs, require such Accounting Information. The users of Accounting Information for any accounting entity are broadly classified into Internal and External categories. A) Internal Users – This category of users are associated with the management of the concern for which the Accounting Information is sought to be collected and provided.

They include the individual and collective decision making bodies in the concern such as the Owners on one hand and the team, departmental, regional and top Managers of the entity. All Officers, Managers and the Directors/Partners come in this group of users. Occasionally, the internal Auditors would have to refer to past financial information statements of the entity and thereby become an internal user of Accounting Information. The internal users generally rely on any Source Document/s (documentary evidence of transactions like Bills, Cash-Memo etc. ), P/L Account, Income & Expenditure Account, Balance Sheet, Cash Fund Flow Statements, Balance Sheets, Explanatory Notes & Schedules Of Workings Annexed To The Financial Statements & also Planning & Budgetary information. (1) Owners – They need Accounting Information mainly to determine the prospect of the investments already made, the solvency of the operation, the efficiency and profitability of the business and the optimum capital/resource utilizations. (2) Managers – This group of users generally and uniformly requires the Accounting Information for the planning, operating and controlling aspects of the concern.

B) External Users – The external users consist of two distinct sub-groups – the Financial Group and the Public Group. Unlike the internal users, the need of the external users with regard to Accounting Information is explicitly different from group to group. Though they generally rely on the similar sources of Accounting Information like Internal users – that is, P/L Account, Balance Sheet, Notes & Annexure Attached To The Financial Statements, however, there are also some specialized types of Accounting Information demanded by the External users like Tax Returns, Trade Policies etc. 1) Financial Group consists of the Investors, Lenders/Bankers and Suppliers/Trade Creditors of the concern. a) Investors – need Accounting Information to decide about the risk factor involved in making investment and in holding on to the equities they already have in the said entity. The profit and loss statement of the entity would also motivate them to either increase or decrease their stakes. b) Lenders/Bankers – assess the confidence of the payment of interest and the repayment of the principal on the loans extended to the entity by the latter based on the Accounting Information. ) Suppliers/Trade Creditors – for them, the Accounting Information provide with a reasonable idea on the credibility of the entity and thereby allowing them to decide whether to continue to supply (credit sale) inputs to the said entity. (2) Public Group comprises of the Government Agencies & Tax Authorities, Industrial Authorities & Research Workers, Labour Unions, Employees & Customers. a) Government & Tax Agencies – As because the financial health of the nation is ultimately the responsibility of the Government, hence any economic activity today is controlled and regulated by the same.

It has to judge the prospect of a business and the mode of its functioning. Naturally, it would require any information to decide proper allocation of natural resources, impose duties etc. The Tax authorities would need to judge the appropriate tax levies on the entity. b) Labour Unions & Employees – both rely on the Accounting Information to assess the health of the entity since their present and future benefits and growth are both essentially dependent on the fortunes of the said concern. ) Customers – they range from the process owners in the manufacturing or service chains linked to the entity in question to the wholesalers/retailers stocking on the product or services from the entity and ultimately the end-consumers. Depending upon the assurance of continuity of the entity, will these customers be ready to maintain their association with the concern or switch over some substitute/competitive entity. d) Industrial Authorities & Researchers – The Industrial regulators need information to take decisions regarding subsidies, grants, relief etc.


Free Essays

Accounting Fraud at Worldcom

SUBJECT: Accounting fraud at WorldCom Problem Statement WorldCom penetrated the largest accounting fraud in U. S history by overstating its tax income between 1999 and 2002. The main players in WorldCom’s accounting fraud included CFO Scott Sullivan, the General Accounting and Internal Audit departments, external auditor Arthur Andersen, and the board of directors.

While individuals did have their own sins, employees cowardice and self-interested, the board passive and ineffective, external auditors preoccupied, and bankers permissive, WorldCom’s organization structure and culture should take most of the responsibility that Ebbers could cooked the book by misleading Wall Street and its own employees.

How WorldCom’s organization structure and culture contributed to pressure and group thinking extending the long period that finally led to the fraud? Analysis The fraud heavily attributed to the way the CEO Ebbers ran the company. First of all, WorldCom’s poor company culture led to a lack of a positive mechanism for employees to propose concerns and feedback and also effective communication between departments and between the board and employees.

Ebbers individually determines the whole company’s value and standards; he demanded unrealistic revenue, limited inquiry, concealed information, mislead and threat employees but there is no specific governance on his own behavior, finally resulting in the corruption growing in the company. Second, WorldCom lacked segregation duties and independence among related departments, which made the accounting tricks possible without detection. Third and the most critically, WorldCom lacked a corporate code of conduct so that an unethical corporate culture was created throughout the company.

WorldCom’s acquisition of more than 60 firms in the late 1990s increased the difficulties for Ebbers to effectively manage the company and maintain an ethical culture without a written policy. Scharff[1](2005) believes that the unethical behaviors and practices of Worldcom were created by groupthink, defined as a “mode of thinking that people engage in when they are deeply involved in a cohesive in-group, and the members override any motivation to appraise alternative courses of action”.

Instead of figure out their concerns, many executives like Vinson just follow suit. Recommendation(s) WorldCom should create a positive and healthy corporate culture building trust and also respect for each employees; especially middle-level managers should not be under pressure to make unethical decisions. Open, reliable and effective communication should be encouraged. Conflicts of interest should be avoided.

More importantly, a corporate code of conduct should be established to guide the behaviors of all employees, including CFO and CEO, in which there is not only principles providing basic guidelines to follow such as the consistency, sincerity and good faith applying to a company’s operation, but also rules providing specific boundaries which behavior is not allowed or will suffer from penalties that help maintain a healthy and ethical corporate culture. ———————– [1] http://www. helium. com/items/1411484-ethics-failure-and-accounting-fraud-at-worldcom? page=3