Busfin 700 - Business Accounting and Finance Lecture Notes PDF

BUSFIN 700 – Business Accounting and Finance Topic 1 Accounting information and society Dr Marco Eugster, CFA  Introduction | Ethics and professional conduct | Accounting information and decision making Introduction - Topics Ethics and professional conduct ‒ Ethics...

BUSFIN 700 – Business Accounting and Finance Topic 1 Accounting information and society Dr Marco Eugster, CFA  Introduction | Ethics and professional conduct | Accounting information and decision making Introduction - Topics Ethics and professional conduct ‒ Ethics in practice ‒ Principles of ethics ‒ Ethics in finance Accounting information and decision making ‒ What is a firm? ‒ The role of accounting ‒ Accounting regulation Textbook chapters: Chapters 1-3 of Accounting: Business Reporting for Decision Making, Jacqueline Birt et al. 2  Introduction | Ethics and professional conduct | Accounting information and decision making Ethics in practice - Right and wrong Source: Slides 3-7 are partly based on material from The Ethics In Finance Project, https://www.ethicsinfinanceproject.org/ 3  Introduction | Ethics and professional conduct | Accounting information and decision making Ethics in practice - Bernie Madoff The Bernie Madoff case is complex and has many aspects What are the What makes the mechanics of a scheme unethical? Ponzi scheme? What are the How did Madoff roles and get away with it responsibilities of for so long? financial advisers? 4  Introduction | Ethics and professional conduct | Accounting information and decision making Principles of ethics - A utilitarian approach to ethics Utilitarianism is a consequentialist philosophical approach to ethics Whether an action is right or wrong is based on whether it increases or decreases aggregate happiness (utility) How would a utilitarian evaluate the Madoff Ponzi scheme? What are the advantages and disadvantages of a utilitarian approach to ethics? 5  Introduction | Ethics and professional conduct | Accounting information and decision making Principles of ethics - A duty-based (deontological) approach to ethics Deontology applies the logic of ‘duty’ to the question of ethics Whether an action is right or wrong is based on whether it is consistent with universal duties, obligations or requirements, regardless of the outcomes of the behaviour Would Madoff’s actions have been unethical if he had been able to unwind his scheme before it collapsed and he was caught? What are the advantages and disadvantages of a deontological approach to ethics? 6  Introduction | Ethics and professional conduct | Accounting information and decision making Principles of ethics - Virtue ethics Virtue ethics does not search for overarching standards of conduct but instead on what it means to be ‘a good person’ This involves virtues (character traits) that shape a person’s behaviour Virtuous character traits lead to actions consistent with ethical values and principles What virtues/character traits make a person good? Did Madoff lack any of these virtues (alternatively, what vices did he possess)? 7  Introduction | Ethics and professional conduct | Accounting information and decision making Ethics in finance - Importance of ethics in finance Why are ethics important in finance? 8  Introduction | Ethics and professional conduct | Accounting information and decision making Ethics in finance - Code of ethics, policies and standards Principles for ethical behaviour are often expressed in a Code of Ethics More detailed guidance is often contained in a set of standards or a policy For example, CFA Institute has the CFA Institute Code of Ethics and Standards of Professional Conduct CFA Institute requires its members (as well as CFA candidates) to abide by the Code and Standards See https://www.cfainstitute.org/en/ethics-standards/ethics/code-of-ethics- standards-of-conduct-guidance for more information 9  Introduction | Ethics and professional conduct | Accounting information and decision making What is a firm? - Different forms of business What characterises a corporation or ‘company’? ‒ Separate legal entity owned by shareholders ‒ Limited liability ‒ Unlimited (perpetual) life This contrasts with other forms of organisation ‒ Sole proprietorships ‒ Partnerships ‒ Limited partnerships In this course, we use ‘corporation’, ‘company’ and ‘firm’ interchangeably 10  Introduction | Ethics and professional conduct | Accounting information and decision making The role of accounting - What is accounting? Information about the operations of a company The process of accounting Identifying Measuring Communicating Decision making Transactions This stage Accounting Accounting that affect the includes the information is information is entity’s analysis, communicated used for a financial recording and through range of position are classification various decisions by taken into of business reports such external and consideration transactions as the internal users They must be statement of able to be profit or loss, reliably statement of measured and financial recorded positions and statement of cash flows Source: Birt et al. 11  Introduction | Ethics and professional conduct | Accounting information and decision making The role of accounting - Why do we need accounting and who uses it? Accounting information enhances decision making ‒ Planning ‒ Investment decisions ‒ Valuation ‒ Verification and compliance There are both internal and external users of accounting information ‒ Internal users are the company insiders (managers and owners/shareholders) ‒ There is a large range of external users including banks, suppliers, customers, employees, governments and regulators, special interest groups and society in general There are two types of accounting: financial and management… 12  Introduction | Ethics and professional conduct | Accounting information and decision making The role of accounting - Financial accounting Financial accounting: the preparation and presentation of financial information for all types of users to enable them to make economic decisions regarding the entity ‒ General purpose financial statements (GPFS) meet the information needs of general users and are prepared according to official accounting rules ‒ Special purpose financial statements meet the specific information needs of a particular user 13  Introduction | Ethics and professional conduct | Accounting information and decision making The role of accounting - Management accounting Management accounting: providing economic information for internal users (management and owners) ‒ E.g. for planning/budgeting purposes, monitoring and control ‒ Few rules and less formal ‒ Can have any desired level of detail 14  Introduction | Ethics and professional conduct | Accounting information and decision making Accounting regulation - Who regulates accounting? There are several different bodies and entities involved in the regulation of accounting: External Reporting Board (XRB): independent Crown Entity which sets accounting and auditing standards in New Zealand ‒ https://www.xrb.govt.nz/standards/accounting-standards/accounting- standards-framework/ Stock exchanges such as the NZX in New Zealand which specify listing rules for listed entities: ‒ https://www.nzx.com/regulation/nzx-rules-guidance/nzx-listing-rules Professional accounting associations whose members must ensure their entities comply with accounting standards when preparing GPFS ‒ https://www.cpaaustralia.com.au/ ‒ https://www.charteredaccountantsanz.com/ 15  Introduction | Ethics and professional conduct | Accounting information and decision making Accounting regulation - GAAP and IFRS Accounting standards issued by the XRB Board or the New Zealand Accounting Standards Board (NZASB) and are the primary indicators of generally accepted accounting practices (GAAP) in New Zealand New Zealand for-profit publicly accountable entities use NZ equivalents to International Financial Reporting Standards (NZ IFRS) Accounting standards framework – For-profit entities Tier Entity type Standards Has public accountability or is a large for-profit Tier 1 public sector entity with total expenses > $30 NZ IFRS million Has no public accountability and is not a large NZ IFRS Reduced Disclosure Tier 2 for-profit public sector entity with total expenses Regime (NZ IFRS RDR) ≤ $30 million and elects to be in Tier 2 Source: XRB 16  Introduction | Ethics and professional conduct | Accounting information and decision making Accounting regulation - The Conceptual Framework The revised Conceptual Framework for Financial Reporting (Conceptual Framework) was issued in 2018 by the International Accounting Standards Board (IASB) https://www.ifrs.org/issued-standards/list-of-standards/conceptual- framework/ In New Zealand, the XRB has issued the New Zealand Equivalent to the IASB Conceptual Framework for Financial Reporting (2018 NZ Conceptual Framework) https://www.xrb.govt.nz/standards/accounting-standards/for-profit- standards/conceptual-frameworks/ The purpose of the Conceptual Framework is to assist in developing accounting standards and policies and to help in understanding and interpreting the standards 17  Introduction | Ethics and professional conduct | Accounting information and decision making Accounting regulation - The Conceptual Framework The Conceptual Framework has two fundamental qualitative characteristics Relevance Faithful does the information representation make a difference to is the information the decisions made by complete, neutral and users? free from error? 18  Introduction | Ethics and professional conduct | Accounting information and decision making Accounting regulation - The Conceptual Framework In addition, there are four enhancing qualitative characteristics: Verifiability Comparability is it possible to check if are users able to the information compare information faithfully represents between entities and what it is supposed to over time? represent? Timeliness Understandability is the information is the information available in time to communicated clearly make decisions? and concisely? 19  Introduction | Ethics and professional conduct | Accounting information and decision making Accounting regulation - GAAP and IFRS in other countries Many countries base their accounting standards on IFRS, with some adaptations to suit the local environment The US is an exception: ‒ US GAAP are a collection of commonly-followed accounting rules and standards for financial reporting adopted by the US Securities and Exchange Commission (SEC) ‒ There are substantial differences between US GAAP and IFRS ‒ The SEC intends to move toward IFRS, but the process has been slow This can create complexities for financial analysts wanting to compare financial information between companies in different countries For more, see: https://www.cfainstitute.org/en/advocacy/issues/gaap#sort=%40pubbrows edate%20descending 20