Accounting Quality - Research Paper

Introduction

The roles of the Board of Directors and Chief Executive Officer of a public company for establishing an ethical environment that can generate quality accounting and reliable financial reporting for use by shareholders and investors.Accounting in itself is a key component in any form of organizational setting. The accounting process is critical in ensuring that an organization property manages its resources and avoids losses of any kind. Whereas the accounting has been attributed to financial accountability of any organization, the process espouses responsibility for fixed assets as buildings and machinery. Through accounting, economic and financial information are able to be delivered. This information is relatively important in the organizational, and management processes of any business entity. It is important to understand that accounting information has various users. Some of these users include; creditors, the government, owners, managers, and most importantly investors. For any businessman, financial statements are crucial since they assist in determining particular information that will guide in key business decisions. Thus, we can confirm that accounting has two functions, first, the managerial functioning, and second, the historical functioning. They include; organizing, decision making, controlling and planning. Therefore, in this paper, we shall discuss various issues related to accounting. Therefore, the leadership of any organization is at the epitome of setting proper accounting principles that must be adhered to by all employees to avoid any resource misappropriation.

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Roles of the Board of Directors and Chief Executive Officer in establishing an ethical environment that generates quality accounting and reliable financial reporting for use by shareholders and investors.

The business of a company is usually managed under the direction of the Board of Directors, who deputies to the Chief Executive officer, who then later transfers to other senior management, the role of conserving the organizations reporting (Frost, 2015). Hence, an organization can maintain a code of ethics and business conduct which articulates for all, suppliers, employees, customers, and shareholders. The BOD and the CEO must be competent enough to point out at any eventuality in the misappropriation of any accounting process within the organization as a means of creating accountability and ensuring that the organization lives up to its financial obligations.

The Board of Directors must know the positions of codes of ethics in establishing a group of morally driven workers, its implementation by the relevant authority, and its full acceptance by all staff. Thus, the starting place for forging a corporate culture is responsible. The BOD needs to transfer power to the senior management for the enactment of company veracity programs. A code can work if people know about it. Also, in the demonstration of accountability and commitment communication is key. "Written ethics policies establish expectations for all employees; spell out exactly the expectations on topics such as theft, intellectual property protection, and proper use of resources and treatment of colleagues. Policies also define the specific characteristics a company wants to represent, such as integrity, honesty, and respect. Employees should receive a copy of the code of ethics and sign a form stating they recognize those expectations" (Frost, 2015). Therefore, the Board of Directors expects that the CEO has to offer both external and internal management in the ethics area.Strategies that can be implemented to lead to an ethical environment and high-quality accounting, reporting, and forecasting.

The Chief Executive Officer can implement an internal audit role whose leader will report straight to the Audit Committee. The internal audit is one of the best ways of ensuring that an organization manages and controls against any possible financial misappropriation and to ensure that an organization keeps up with the market pressure as well as overcome its internal threats that include financial misappropriation. The internal audit role deals with fashioning a methodical, meticulous approach to evaluate; governance, management, and control process. Their primary responsibility will be monitoring the acquiescence of the company's processes with internal control, and the identification all paucities in the design. Rendering to Section 404 of the "Sarbanes-Oxley Act," "state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting" encourages such a tactic. The internal audit function may promote a more ethical workplace environment, which will offer high-quality reporting and accounting.

How can corporate management provide guarantees to investors that the performance forecast and expected earnings will be realized, minimizing the volatility of the stock price?

Investors' concerns of expected recognition of earnings and forecast require due diligence from corporate administration analyses. Since all businesses are valued based on a compound of EBITDA (earnings before interest, taxes, depreciation, and amortization), the providers of financial due diligence tend to focus on sustainability or quality, of the revenues of the company (Lamb & Smith, 2012). Unusual expenses and incomes, tend to understate or overstate liabilities/assets, the unreliable use of accounting principles, and post-closing cost structure variations, are evaluated to adjust (EBITDA) to reflect workable incomes. Accordingly, investors need to understand the assumptions employed by the management in the creation of this forecast.

A tool which an investor can use is an audit. An audit provides guarantee that the management has offered a fair and true view of the organization's fiscal performance, and position under the required procedures and rules. Also, for an investor to make sure investment decisions, they have to be able to understand that the audit is a complement rather than a substitute for a personally designed financial due diligence examination of the objective investment.

What are the major consequences to a publically traded company when there is a lack of quality within financial accounting and reporting? How these consequences may be minimized.

The costs of the lack of quality in financial reporting and accounting may arise from the failure of management' selection of proper accounting procedures. The management team has to be able to assure the Board of Directors on the accuracy, and reliability of the organization's financial statements and accounting procedures. Hence, they should design and implement a strong in-house control system to avoid poor reporting by monitoring important information in financial reporting.

It is important to understand that the management is wasting peoples' time, whenever they are reporting poor financial statements. The amount of time wasted in drafting the false information, and the time used to make proper corrections to the information if realized damages the bottom line. "Precious hours and days that could be used to concentrate on building profitable sales growth go down the drain" (Lafferty, 2013). All this time would have been used to make more money for the company.

An additional improper and long use of financial reporting is recording various revenue inflows into one account. For accountability purposes, those streams need to be segregated, for the CFO to get a clear understanding of which areas of the company are performing better than others. Consequently, the misclassification of expenses into the overhead, instead of cost of goods sold may affect the gross margin if misallocated. For instance, if an organization desires to launch a new product, the manager will attempt to determine the sales to offset the cost, and then to make a profit. If the management does not have the proper figures on gross margin, their decision will be made based on invalid numbers. Such a reporting based on invalid figures may end in the failure of the new product. Through an organization addressing these reporting concerns, the management can make profitable investment decisions.

The requirements of the Sarbanes-Oxley Act related to accounting quality, indicating whether or not you believe the requirements are sufficient to protect stockholders and potential investors.

The Sarbanes-Oxley Act is famous for the strengthening of two key areas in investor protection. First, the CFO and CEO have more accountability and responsibility for financial related controls and disclosure. Second is increasing engagement and competence of the company's audit committees. Nonetheless, while evaluating the general efficiency of SOX, a crucial consideration to make is if the performance of independent auditors has improved over the last decade (Verschoor, 2012). The significance of any auditor is to manage that the organization is subject to the security laws. This helps to safeguard the investors' interests in preparation of independent, informative, and accurate audit reports.

Conclusion

In conclusion, the question of accountability could take a step in the direction of effective regulation. An organization incurs costs for its audit processes, so from a theoretical perspective, if the business desires a comprehensive report, they can get and hire a professional auditor to give them the desired report. An accounting organization offers several services to all its clients. In other terms, they are just like any other business. The business industry makes speculations that accountants need to have ethical barriers, and are not prone to greed, and misrepresentation is not an accurate assumption. Accordingly, accountants take an oath and are required to do so, but they are also normal humans' who are tempted and fail. Lastly, more regulations and processes should be introduced on how to attain an unbiased audit.

Reference

Frost, S. (2015, August). How a Company Develops & Maintains an Ethical Environment. Retrieved August 13, 2015, from Small Business Website: http://smallbusiness.chron.com/company-develops-tains-ethical-environment-37312.html

Lafferty, J. (2013, March 05). The Paralyzing Problems of Poor Financial Reporting. Retrieved August 16, 2015, from CFO PRO website: http://cfo-pro /the-paralyzing-problems-of-poor-financial-reporting

Lamb, B., & Smith, L. (2012, Feb). Understanding the differences between an audit and financial due diligence. Retrieved August 16, 2015, from Maxwell, Locke & Ritter Web Site: http://www.mlrpc.com/articles/undending-the-differences-between-an-audit-and-financial-due-diligence

SOX. (2002, August). The V201endor-Neutral Sarbanes-Oxley Site. Retrieved August 13, 2015, from SOX-online website: http://www.sox-online.com/act_sect_404.html

Verschoor, C. C. (2012, 09 05). Has SOX been successful? Retrieved August 16, 2015, from Accounting Web Web site: http://www.accountingb.com/practice/practice-excellence/has-sox-been-successful