Change in the Method of Accounting Analysis of Case of Cocoa Ltd

Question: Discuss about theChange in the Method of Accountingfor Analysis of Case of Cocoa Ltd. Answer: Introduction The accounting profession plays a crucial role in economic and social development of a country. Therefore, it is customary that the professionals in the field of accounting are abided by the rules and regulations so that compliance with the aspect of ethics and governance in financial reporting is ensured. It has been seen that big companies like Enron, Worldcom, and Tyco failed in surviving after committing frauds in financial reporting (Accounting Degree, 2016). In this context, a discussion on ethics and governance in the field of accounting has been carried out through analysis of Cocoa Ltd case. Principle of Ethics and Governance in Accounting The code of conduct is issued by every country that requires compliance with the principles of integrity and honesty by the professionals in the field of accounting. Further, at the international level, the code of conduct is issued by Internal Federation of Accountants (IFAC) (IFAC, 2006). As per the principles laid down in the code of conduct issued by IFAC, the professional accountants should ensure compliance with the principles of integrity, competence, and prudence, and principle of confidentiality. While discharging their duties, the professional accountants should ensure that they work in the best interest of the stakeholders (IFAC, 2006). However, it is crucial to note that the adequate implementation and adherence to the principles of code of ethics depends upon adequacy of the system of corporate governance in the company (Calder, 2008). The system of corporate governance encompasses rules and procedures framed by the management of the company. These rules and procedures are directed to control the business affairs and manage them in the interest of the stakeholders. Thus, the primary objective of corporate governance is to carry out the business activities in the best interest of different groups of stakeholders such as shareholders, suppliers, lenders, and government (Calder, 2008). The code of ethics requires that the accountant should be free of any inducement and perform their duties ethically. The breach of principles of code of ethics is punishable with high monetary charges and imprisonment, thus, the accountant should avoid indulging in conflicting situations (IFAC, 2006). Analysis of the Case In the current case, the management of Cocoa Ltd seeks to manipulate the financial statements to achieve anterior motives. The company is earning high profits and it is expected that current growth rate will continue for couple of more years. However, it is also expected that after the upcoming two years, the financial performance of the company will turn down. Considering these facts, the management of the company asks the accountant to reduce profits of the current years so that bad financial performance in the future years does not appear as complete collapse to the stakeholders. For the purpose of manipulating the financial statements, the accountant has identified depreciation as the item for adjustment and manipulation. In the current case, the accountant proposes to change the method of depreciation from straight line method depreciation to sum of years digit method without a suitable cause. Finding and Discussion As per the provisions contained in AASB 116, Property, Plant, and Equipment, the depreciation method selected by the management should result in a charge of depreciation which accurately reflects the future economic benefits (AASB, 2016). This implies that whichever method is selected for computation of depreciation, it should provide a charge that complies with the matching concept of accounting. The AASB further provides that change in the method of depreciation is permissible in the later years. However, it should be endeavored that consistency is maintained unless circumstances justify a change in deprecation method (AASB, 2016). There various methods that can be adopted to charge depreciation among the top used are Straight Line Method, Declining Balance Method, and Sum of Years Digit method (Weil, Schipper, Francis, 2013). The choice of method depends upon the managements judgment as to the appropriateness of a particular method in the given circumstances. The straight line method provides same charge for all the years throughout the useful life of the asset. However, in case of declining balance method, the charge of depreciation gets reduced as the years pass. In the later years, the charge of depreciation is reduced significantly due to its been charged on the written down value of the previous year. On the same lines, the Sum of Years Digit Method also provides for lesser charge in the later years (Weil, Schipper, Francis, 2013). The depreciation is one of the crucial most items which have great bearing on the financial performance of the company. Therefore, the change in the method of depreciation could have really a huge impact on the reportable profits of a company. The AASB 116 prescribes that the management of the company should have periodical review of the method of accounting to ensure that it remains relevant (AASB, 2016). Further, it is prescribed that when the management comes across significant changes that provide a hint that the pattern of future economic benefits to be earned from the use of asset has changed, the management should change the method of accounting. In essence, it could be articulated that there must be proper justification for the change in the method of depreciation (AASB, 2016). In the current case of Cocoa Ltd, it has been observed that the management is following straight line method of depreciation and considering now switching to Sum of Years Digit Method. The change in the method of depreciation would increase the depreciation in the initial years resulting in lowering the profitability. Whereas, the depreciation charge in the later years would be decreased resulting in enhancement in the profitability. There is no proper justification for the change in the method of accounting apart from achieving the anterior motives (AASB, 2016). The management just wants to do window dressing on the financial statements so as to keep the investors with the company. Changing the method of accounting in the absence of proper reason would be violating the provisions of the accounting framework. The AASB 116 requires proper discloser in regard to the change in the method of accounting by way of a note to the financial statements. Non-compliance with these provisions of the accounting standard clearly shows that the accountant is departing from her duties (AASB, 2016). Further, it was observed that the accountant of Cocoa Ltd agreed to carry out changes in the method of accounting on the request of management because she was concerned about renewal of her contract with the company. Thus, the accountant went into conflict of interest situation. In this situation, the accountant should not have agreed to carry the managements wishes. Changing the method of accounting just to manipulate the presentation of the financial statements is violating of the provisions of AASB 116 (AASB, 2016). Further, it also shows that the governance mechanism in the company is also quite weak. There must be adequate reporting and authorization system in the company so that unethical conducts are identified and rectified at the early stages (Lessambo, 2016). Carrying out business affairs in an unethical manner would affect all the stakeholders adversely. The investors will lose faith in the company on revelations of the breach of code of ethics and corporate governance principles. Conclusion From the discussion carried out in this paper, it may be concluded that the compliance with the code of ethics and rules and procedures of corporate governance is crucial to achieve the objectives and long term goals. The change in the method of depreciation as requested by the management of Cocoa Ltd is completely unjustified and violating the principles of AASB 116. Therefore, the accountant should not agree to change the method of accounting without a proper justification. References AASB 116. 2016. Property, Plant, and Equipment. Retrieved December 19, 2016, from https://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun14_07-14.pdf Accounting Degree. 2016. The ten worst corporate accounting scandals of all times. Retrieved December 19, 2016, from https://www.accounting-degree.org/scandals/ Calder, A. 2008. Corporate Governance: A Practical Guide to the Legal Frameworks and International Codes of Practice. Kogan Page Publishers. IFAC. 2006. Code of Ethics for Professional Accountants. Retrieved December 19, 2016, from https://www.ifac.org/system/files/publications/files/ifac-code-of-ethics-for.pdf Lessambo, F. 2016. The International Corporate Governance System: Audit Roles and Board Oversight. Springer. Weil, R.L., Schipper, K., Francis, J. 2013. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.