Bahan Kuliah Accounting Theory Presentation

8/11/2019 Bahan Kuliah Accounting Theory Presentation

1/58

Eddy R.RasyidAndalas University

The Future of Financial Reporting:From the Early Nineteenth Century to

the Recent Global Crisis

Prof. Eddy R.RasyidDrs. Akt [UGM], MCom -Hons [Uwo ll ] , PhD [Uwo ll ]

Universitas Andalas


2/58


Resume

Birth: Bukittinggi 1979-1984: Drs.Akt [UGM] 1990-1996: MCom(Hons) & PhD[Uni of Wollongong, Australia 1996-1997: Director, Centre for Accounting Development (PPA) FE

Unand

1997-2002: Head Dept. of Accounting 2000-2004: Executive Director QUE Program, Accounting Dept. 2002-2006: Director of MM FE Unand 2006-2010: Head of IAI KAPdEducational Development 2008-2010: Head of IAI KAPdOrganisational Development

Audit Committee PT Semen Padang Member of Higher Education Board (DPT) Dikti


3/58


Outline

During the 19thCentury accounting

Early Twentieth Century: Accounting byNorms

1929 Crash: Norms Challenged

1998 and then the Recent Global Crises:

Swing Back?Finally: Issues in the Future


4/58


Introduction


5/58


Introduction

The recent accounting and auditingfailures have received much attention.

Institutional or individual failures? Or both?

Attempting to look briefly at the changeshappened from the early nineteenthcentury to the recent era and whatresponds made.


6/58


The Era of 19th

Century


7/58


Accounting Practices Emerged

Reports of accounts including profit and lossrecords have been in practices since 1600.

However, the evolution of accounting from book-keeping was there in the era of 19thcentury.

In this era,profit was conceptualised as thegrowth assets, while the concepts of costsandincomewere yet not there.

The emergence ofjoint ventures in UK where

investors put their money lead to the significanceof periodical reports.


8/58


Separation of Income with Capital

The separation of capital with income started as the emergence ofcorporation.

According to Scott (2006)*, it is in this era a long transition periodstarted: from accounting as a controlling system with whichbusinessman could control their business, to accounting as asystem providing information for investors who have not involved inthe management of the corporation.

A common interest between investors and the company lead to aneed of trustworthy information.

This circumstances encouraged the emergence of auditing practicesand a need to regulate accounting.

WR Scott, Financial Accounting Theory, fourth edition, Pearson, 2006, h. 2.


9/58


UK Companies Act1844

The UK Companies Act1844 requires thatbalance sheet for investors to be audited.

Consequently, accounting practices had toconsider the Act. For example, devidend has to

be taken from profit and accounts have to beaudited by independent persons.

However, at that time any person could performauditing.

Companies Act 1844 together with otherregulation together with Industrial Revolutionhave lead to a need of accounting professionalstandards.


10/58


Industrial Revolution: USA

At the end of 19thCentury, Industrial Revolution reached USA. It is followed by the move of accounting development. The introduction of corporate income tax in 1909 in US encouraged

such an awareness on the importance of income measurement. Managers then started to reduce amortisation from income.

However, prior to the 1929 stock market crash followed by a greatdepression, accounting had just minimally regulated (unregulated) Following the 1934 Securities Exchange Act, there was a formation

of the Securities and Exchange Commission (SEC) with the primefocus is to protect the interests of investors by issuing regulation thatis based on disclosures.

SEC is accountable to ensure that all investors will have relevantinformation on companies issuing and trading their stocks.


11/58


Early Twentieth Century:

Accounting by Norms

Early Twentieth Century:

Accounting by Norms


12/58


13/58


Nature of Norms

Norms of a group are shared (common knowledge)expectations of its members about the behavior of others Etiquette, dress, table manners, grammar, language, customary

law, private associations

Objective of norms is observable behavior, notunobservable beliefs

Must be a consensus, not just majority support

A new entry of norms becomes respectable by attractinga following, not by enforced authority


14/58


15/58


16/58


Mechanism to Identify the Norms

The absence of authoritative standards of accounting did not meanthat the world of accounting had less order.

Active mechanisms the accountants used to identify the norms oftheir profession Journal of Accountancyand the CPA Journal served as forums for

active, even feisty debates on accounting and auditing. During 1920-29, the Librarian of the Institute issued 33 special

bulletins on topics referred to them, without the authority of theInstitute.

In 1931, the Institute published a 126-page bookAccountingTerminology, a compilation of accounting terms and their definitions asa matter of advice, not authority.

Throughout the 1920s and into 1930s, a committee of the Instituteworked in close cooperation with a committee of Robert MorrisAssociates, an organization of bank loan officers, to respond to inquiriessubmitted to them.


17/58


1929 Crash:Norms Challenged


18/58


Loss of Credibility

The stock market crash of 1929 Severe economic depression that followed, precipitated

another crash

Loss of credibility of norms of accounting, and the formalor informal mechanisms by which these norms evolvedand were sustained

Too many had lost wealth, livelihoods, even lives Financial reporting wrong doing were very deep, people

lost trust in the social contractShyam Sunder, Social Norms Versus Standards of Accounting, in M. Dobija and Susan Martin, eds., General

Accounting Theory: Towards Balanced Development, pp. 157-177. Cracow, Poland: Cracow University ofEconomics, 2005.
http://www.som.yale.edu/faculty/Sunder/Norms/SocialNorms-StandardsofAccountingGAT3.pdfhttp://www.som.yale.edu/faculty/Sunder/Norms/SocialNorms-StandardsofAccountingGAT3.pdf


19/58


Moving [or Swing .?]

Since the enactment of the securities laws in theearly 1930s, the U.S. has seen a steady shift infinancial reportingFrom business and professional norms towards

legislated written standards enforced by threats ofexplicit punishment for violators

This shift altered virtually all aspects ofaccounting (including accounting education)

The recent events can be seen as aconsequence of the policy decisions of the pastseven decades (Sunders 2006).


20/58


The Norms Does Not Work

Politicians responded the only way they couldand introduced federal securities laws andregulations (to override the states)

In the following seven decades, accounting andaudit failures have been interpreted as evidencethat norms do not work;

Norms were gradually shifted to the back burner,

and accounting standards gradually rose todominate corporate financial reporting


21/58


Norms Not Well Defined

Social conventions and norms are rarely well defined,vary in time and space, require an extended socializationprocess to learn and understand.

They carry a penumbra of uncertainty about them.

Substantial but incomplete overlap among the beliefs ofthe individual members of a group about its norms.

Norms evolve in small, almost imperceptible steps, byprocesses that are not well understood.

This evolution is decentralized, difficult to predict thefuture direction.


22/58


Pressure to Write Standards

While the evolutionary process is not solid, thelack of definition and our poor understanding ofhow norms evolve make them less transparent

During periods of crises, political or bureaucraticdecision makers feel pressured to write newstandards rather than continue to rely onexisting (recently discredited) norms and

business practices


23/58


Working with Regulation

In 1933-34, U.S. Congress give SEC the legal authority to regulatefinancial reporting

The first three decades: mostly codified the existing practices Gradually, these efforts shifted from identification of conventions or

social norms to promulgation of standards with increasing power ofenforcement

Increasingly assertive nomenclature of the three private sectororganizations to write accounting rules The Committee on Accounting Procedures Accounting

Research Bulletins (1948-59) The Accounting Principles Boards Opinions (1959-73)

The FASBs Financial Accounting Standards (1973 to present).

(IASBs International Financial Reporting Standards being the latest addition to this trend)


24/58


Standardisation Going On

Accountants shifted their allegiance from norms toauthoritative promulgation.

Profession now views standardisation as a measure ofprogress (the thicker the book the better).

There has been little research and debate on merits andconsequences of standardization in accounting.

By 2000, the social norms have few advocates left, mostfavor legislated standards (with legal enforcement)model for financial reporting.


25/58


26/58


27/58


Consequences

More competition in the market for audit services hasprogressively replaced judgment by mechanicalprocesses.

The competition has driven up the demand for both

accounting as well as auditing standards. FASB/IASB are busy writing reams of standards

Standards have replaced the sense of personalresponsibility. (the result is Enron, WorldCom)

But the investment bankers and lawyers are busydesigning new transactions to get around the accountingtreatments of today


28/58


And Then..

Standards relieve mature accountant of the responsibility formaking intellectually sound decisions

Standards prevent thoughtful analysis by auditor becausethey are used in legal proceedings (cannot oppose standards)

Auditors thought standards will help defend what they do, but

they do not No other profession with claim to respect allows itself to be so

driven by standards as accountants have (under the falseimpression that it is better for them)

That they think that standardization of accounting and auditingwill solve the problem, when it might actually be the majorsource of the problem


29/58


1998 and then the Recent Global Crises:

Swing Back?


30/58


Global Crises: Shaking

After almost 50 years working with standards

Asian Crisis 1998

Enron

DotCom Crisis 2002

2008 Global Crisis: Started by Red September Taking over of Fannie Mae and Freddie Mac by the Federal

Government

Merrill Lynch sold to Bank of America

Lehman Brothers files for bankruptcy

The crisis crossing over the continent and passingIndonesia

US and other governments bail out


31/58


Estimated cost of the recent crisis

Country Period Estimated Cost asPercent of

GDPUnited States 1980s 2.5%Japan 1990s 20.0%

Norway 1987-89 4.0%....Korea 1997- 60.0%Indonesia 1997- 80.0%..

USA 2007-2010 $700 billion=5.0%$1600 billion=11.4%$3200 billion= 22.8%

Source: Howel l E. Jackson Harvard Law Scho ol, October 2008


32/58


What was Going On?

Increasingly complex and opaque financialproducts

Unsound risk management practice

Inadequate structural reform


33/58


34/58


.. And Then

Clients actively played audit firms against oneanother to lower their audit fees

The amount and quality of the work done by theauditors was not observable to the clients

Competition for audit services would not sustain aprice to make auditing self-supporting

Auditors responded by a new business model tosurvive in this cut rate environment


35/58


Revised Business Model

Aggressive pricing of audit services

Cut labor-intensive substantive testing, and replace it bycheaper analytical reviews

Use audit service as foot in the clients door to sell

consulting services Share consulting revenue with audit partners

Use consulting revenue to pay for any additional auditliability coverage arising from reduced substantive

testing Reduce the pay for fresh graduates


36/58


The Impacts: Post Crisis

Business and corporate environment hassignificantly changed

Regulatory Change

Strengthening Financial Reporting Governance

Revisiting Risk and Control Reporting

Globalisation of war against frauds andmisconduct.


37/58


Finally ..

Enron and Worldcom, 2 of the 20 largest companies in the US,declared bankruptcy as a result of frauds. Not just in the US!

CEOs and CFOs disclaiming responsibility for fraud.

Arthur Andersen no longer in business.

Part of the decline in US stock market since 2001 has been

blamed on overstated earnings and a lack of confidence in thefinancial reporting process.

Accounting self-regulation process determined to be deficient.

Perception that accounting rules are there for gaming.


38/58


Then . Life Changing

Sarbanes-Oxley Act 2002 (hot issue untilrecently)

Moving from historical cost principle to fair

value.Financial statement emphasises on

Balance Sheet (instead of Income

Statement)

SWINGING BACK?Moving from rules based standards to

principles based on principles


39/58


Sarbanes-Oxley (SOX)

Sarbanes-Oxley was passed to help ensure the accuracy of financial reportingby public traded corporations. Sarbanes-Oxley seeks to improve theaccuracy of financial reporting of public traded corporations. The Act:

Mandates corporate governance reforms.Requires corporations to establishaudit committees, precludes publicly audited clients from engaging an accountingfirm that audits financial statements for non-audit services, and requires

corporations to disclose all material off-balance sheet transactions. Enhances the role and independence of audit committees.The Act requiresthat audit committees pre-approve all audit and non-audit services, receiveregular reports from the auditor on accounting treatments, be responsible foroversight of the auditor, and be independent of the company who registers andsells securities.

Creates public accounting firm restrictions.The Act creates a newAccounting Oversight Board to set standards and supervise accounting firms,

requires all audit or review working papers to be retained for 7 years that supportconclusions in audit reports, requires the rotation of audit partners every 5 years,and requires audit team members to wait a year before accepting employmentwith a client in key financial positions.


40/58


Samples of the Parts

Section 302Required the CEO and CFO to personally sign off on theappropriateness of the firm's financial statement. Sentences for perjury increaseddramatically.

Section 407At least one member of the audit committee be a "financial expert"caused many firms to scramble to find new directors at the same time that theywere facing a crisis in the market for directors insurance. Note: Enron AC Chairwas a financial expert!

Section 404 of the Act has two parts: Section 404(a) describes managements responsibility for establishing andmaintaining an adequate internal control structure and procedures forfinancial reporting. It also outlines managements responsibility for assessingthe effectiveness of internal control over financial reporting.

Section 404(b) describes the independent auditors responsibility forattesting to and reporting on managements internal control assessment.

Section 409 - REAL-TIME ISSUER DISCLOSURESEach issuer reporting

under section 13(a) or 15(d) shall disclose to the public on a rapid and currentbasis such additional information concerning material changes in the financialcondition or operations of the issuer, in plain English, which may include trendand qualitative information and graphic presentations, as the Commissiondetermines, by rule, is necessary or useful for the protection of investors and inthe public interest.


41/58


Post-Enron Regulatory Change:

Focus on Financial Reporting and Internal Control


42/58


43/58


Governance over financial reporting:parties involves in the organization


44/58


SAS 112 Reinforces the responsibility of management for internal control systems.

The auditors cannot be a part of the internal control process for preparingthe financial statements during the audit.

44

The management

provides reasonable assurance aboutthe entitys objectives with regard to

reliability of financial reporting,effectiveness and efficiency ofoperations, and compliance withapplicable laws and regulations.

responsible for making decisionsconcerning costs to be incurred (andrelated benefits) in relation to theexistence of significant deficiencies ormaterial weaknesses .

The auditors

must evaluate internal control

must evaluate identified controldeficiencies and determine whether theyare significant deficiencies or materialweaknesses.

If significant deficiencies or material

weaknesses are identified, they must bereported in writing to management andthose charged with governance (AuditCommittee).

Opine on Consolidated FinancialStatements on 2008.


45/58


Deficiency

A control deficiencyexists when the design or operation of acontrol does not allow management or employees, in the normalcourse of performing their assigned functions, to prevent or detectmisstatements on a timely basis.

A significant deficiencyis a control deficiency(ies) that adverselyaffects the entitys ability to initiate, authorize, record, process or

report financial data reliably such that there is a remote likelihoodthat a misstatement of the entitys financial statements will not beprevented from being detected.

A material weaknessis a significant deficiency(ies) that results inmore than a remote likelihood that a material misstatement of thefinancial statements will not be prevented or detected.


46/58

Eddy R.Rasyid

Andalas University

CEO/CFO Certifications under BAPEPAM Regulation

46

CEO/CFO

certification is intended to explicitly

reinforce that certifying officers CEO/CFO and other

Principal Officers) are DIRECTLY responsible for:

Preparation and disclosure of financial report

Adequacy, accuracy of the financial report

Internal control system in the corporation


47/58

Eddy R.Rasyid

Andalas University

Global Convergence on Accounting Standard: IFRS

EQUIVALENCE PRINCIPLES RULES CONVERGENCE ISOLATION

Source : Internal Control Reporting Compliance: The UK and European Regulatory Scene, by Robert Hodgkinson, Executive Direc tor-Technical ofThe Institute of Chartered Accountants in England and Wales, CPE Conference on SOX 404, Dorchester, UK, 10 May 2007
http://www.euroesprit.org/content/delta2/EU%20Flag.gifhttp://www.corante.com/importance/archives/Flag_of_the_United_States.png


48/58

Eddy R.Rasyid

Andalas University

Moving from Rules Based

towards Principles Based Standards(SWINGING BACK?)

to general definitions of economics-basedconcepts on the other end.

Continuum ranging from highly rigid standards

on one end


49/58

Eddy R.Rasyid

Andalas University

Example: Goodwill

Previous practice:Goodwill is to be amortized over a 40 life until it is fully

amortized.

New IAS rule:Goodwill is not amortized.Any recorded goodwill is to be tested for impairment and written down t

its current fair value on an annual basis.


50/58

Eddy R.Rasyid

Andalas University

Example: Fixed Asset

Two choices of accounting policy:cost model), orrevaluation model

Applied on all fixed assets within a samegroup


51/58

Eddy R.Rasyid

Andalas University

Cost Model

Cost model: After recognition as an asset,an item of property, plant and equipmentshall be carried at its cost less any

accumulated depreciation and anyaccumulated impairment losses.


52/58

Eddy R.Rasyid

Andalas University

Revaluation Model

After recognition as an asset, an item ofproperty, plant and equipment whose fair valuecan be measured reliably shall be carried at arevalued amount, being its fair value at the date

of the revaluation less any subsequentaccumulated depreciation and subsequentaccumulated impairment losses. Revaluationsshall be made with sufficient regularity to ensurethat the carrying amount does not differ

materially from that which would be determinedusing fair value at the balance sheet date.


53/58

Eddy R.Rasyid

Andalas University

Finally:

Issues in the Future


54/58

Eddy R.Rasyid

Andalas University

Issues in the Future

Several of them:Principles versus ComparabilityContradict?

Accounting standards help investors in making betterdecision! Really?

Fair value!? Really applicable? Just a rhetoricaldevice?

Fair value!? Damaging companies?? [especially inIndonesia]

Economists will be really happy? Independence of [Indonesia] standard setting body.


55/58


56/58

Eddy R.Rasyid

Andalas University

Pernyataan Pencabutan SAK

PSAK 32 Akuntansi Kehutanan

PSAK 35: Akuntansi Pendapatan JasaTelekomunikasi

PSAK 37: Akuntansi PenyelenggaraanJalan Tol


57/58


58/58

Edd R Ras id

THANK YOU!!!

AND

SEE YOU AGAIN

Documents

Bahan Kuliah Accounting Theory Presentation