What do accountants assume about the life of a business

Returning to our main point, we note that the ultimate responsibility of internal auditors is to certify or attest to the fact that the statements that present the financial situation of the company are presented fairly, meaning that as much disclosure as is necessary is given to offer a reasonable picture of that financial situation to any user having a claim to that knowledge.

That should be the standard practice and it is what is required for an efficient market. Unfortunately, it is also a standard whose spirit has been seriously violated in recent years.

Besides their attest function and the responsibility to certify the fairness of financial reports, auditors have another responsibility to the markets. There are accountants, investment advisers and rating agencies, all of whom are designated by regulations as necessary bodies charged with keeping the markets transparent and the consumer informed. One could argue that they have all failed miserably in their watchdog function of late.

The legal requirement of audited statements, which the government established for the protection of the investing public, gives accountants a monopoly on attesting to the validity of statements. This leads the public to believe that most of the information they receive is useful. To fail in this function is to fail in fulfilling one of accountant's chief responsibilities. But what sort of responsibilities are they? It was a responsibility to detect error, irregularities or fraud.

These two documents Footnote 14 lay out specific practices that auditors should follow in setting up audits, and they can be particularly useful in evaluating recent behaviour of accounting firms such as Arthur Andersen. When one looks at recent behaviour, in many cases auditing firms did not take their responsibility to detect error irregularities or fraud seriously. Footnote 15 Subsequent memos coming out of Andersen indicated uneasiness with the procedures, but nothing was done about it.

Yet, an examination of the audit standards indicate clearly that Andersen had a responsibility to act on those perceived irregularities of Enron. In the case of another company for whom they were the auditors, Andersen failed to take seriously irregularities that occurred in Global Crossing IRU Swaps, where the swaps had no legitimate business use except to bolster earning statements. Rather, in that case Andersen, acting as consultant, recommended the swap.

According to these standards, an auditor has a responsibility to look for material misstatements or misappropriations of assets or liabilities as well as to assess the risk that errors and irregularities may cause the financial statements to contain a material misstatement. An auditor may not be able to detect a material irregularity because generally accepted auditing standards do not require the authentication of documents, or there may be collusion and concealment.

For example, because of forgery an auditor may not be able to detect a material irregularity, or if a high-level manager is involved in a cover up it may go undetected because of a lack of a proper internal control structure.

Due professional care requires the auditor to exercise professional skepticism. An audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of professional skepticism. The auditor uses the knowledge, skill, and ability called for by the profession of public accounting to diligently perform, in good faith and with integrity, the gathering and objective evaluation of evidence.

The auditor neither assumes that management is dishonest nor assumes unquestioned honesty. Rather, the auditor recognizes that conditions observed and evidential matter obtained, including information from prior audits, need to be objectively evaluated to determine whether the financial statements are free of material misrepresentation.

One can seek in vain for any indication of a skeptical attitude of Andersen the auditor toward Enron the client. If that is the case, Andersen failed in its responsibilities with respect to Enron. Further, in the case of Global Crossing, Andersen was not only not skeptical, it actively encouraged the questionable swaps, which should qualify as an irregularity. Common sense points out what may be a cause of the lack of skepticism. It is difficult to neither assume honesty nor dishonesty when dealing with clients whom one has known for a long time, or on whom one depends for a large part of one's income stream.

But the question of whether skepticism is possible in the present system is a separate issue Nemo dat quod non habet , that is, no one gives what one does not have.

The fact is that the standards require such skepticism. Further, the standards spell out quite specifically what is necessary to be properly skeptical. The skeptical auditor needs to consider factors that influence audit risk especially the internal control structure. Are there significant and unusual related party transactions not in the ordinary course of business?

Are there a significant number of known and likely misstatements detected in the audit of prior period's financials from the predecessor auditor? The standards further require the auditor to review information about risk factors and the internal control structure by considering matters such as the following:.

Are there circumstances that may indicate a management predisposition to distort financial statements? Are there indications that management has failed to establish policies and procedures to assure reliable accounting estimates, by utilizing unqualified, careless or inexperienced personnel? Are there indications of lack of control, such as recurrent crisis conditions, disorganized work areas, excessive back orders, shortages, delays or lack of documentation for major transactions?

Are there inadequate policies and procedures for security of data or assets? The auditor needs to consider the effects of these matters on the overall audit strategy. High risk ordinarily demands more experienced personnel and more extensive supervision. Higher risk will also ordinarily cause the auditor to exercise a heightened degree of professional skepticism in conducting the audit. The accountant may have an obligation to blow the whistle, but that should not be laid upon the accountant without some protections.

Footnote 24 The framework should include a policy on corporate conduct and a system to monitor compliance with the corporate conduct.

The auditor should determine whether the operations of the company comply with the standards of corporate conduct. The auditor should also consider illegal or questionable acts without regard for their materiality. Those then are the responsibilities of the auditor under his obligation to detect irregularities and fraud. Footnote 25 I will not bother to go through an exhaustive litany of the places where firms such as Andersen fell short in their responsibility to be skeptical of companies such as Enron and Global Crossing.

But a brief look at the first three areas of concern ought to indicate Andersen's failure. In the case of Global Crossing Andersen set up the internal control structure and recommended the swaps. Are there significant difficult-to-audit transactions? In the case of Enron, the SPE's and the Mahonia transactions were virtually impossible to keep track of. We can then summarize the major responsibilities of the auditor as first being responsible to the using public for evaluating financial statements and declaring that they represent a fair picture of the financial situation of a company, and second of being a watchdog and calling into question irregular practices that would distort those pictures.

But what caused this lack of due care? Our claim is that one of the chief factors that contributed to the ethical failure of professional accountants and members of other professions to live up to their responsibilities was that they forgot the purpose and role they were to play in the system and became motivated by purely monetary concerns.

An exclusive monetary concern cannot function as an ultimate end and using monetary concerns as such an end will lead accounting firms to abandon their responsibilities and their proper goals while falling into the trap of accumulating wealth for its own sake.

The firms forget what their professional aims are to be about. It was no accident that since the majority of revenues and hence profits for accounting firms in the s began to come from consulting rather than auditing accounting firms lost their focus on the importance of responsible auditing.

This switch from auditing to consulting as the main source of revenue was more or less true of all the big five accounting firms, and it seems clear that the main motive for pursuing consulting was to accumulate more sources of revenue without consideration of how this would affect their responsibilities to the public and the system.

Those other services accounted for 73 per cent of total fees billed by the accounting firms to the companies surveyed. As the large accounting firms grew, they began to expand but failed to consider the purpose of the expansion. Was it to do consulting? Accountants are responsible for the validity of the financial statements they work on, and they must perform their duties following all applicable principles, standards, and laws.

Accountant responsibility varies slightly based on the accountant's relationship with the tax filer or business in question. Independent accountants with some clients see confidential information, ranging from personal Social Security numbers to business sales data, and must observe accountant-client privilege.

They cannot share private personal or business data with competitors or others. Accountants who work for accounting firms also have a responsibility to keep information private, but they also have a responsibility to their firm.

Namely, they must accurately track their hours and tasks completed. For example, an accountant performing an audit should only record items he has actually completed, rather than pretending he has completed items he has not in order to speed up the process or bolster his logged hours.

If an accountant works directly for a business, as an in-house accountant, he has access to information many others in the company do not, ranging from payroll figures to news about staff layoffs, and he also has to treat this information discretely. In addition to having a responsibility to the people who work at the company, in-house accountants are also responsible to stockholders and creditors. If accountants do not uphold their responsibilities, it can have a broad effect on the accounting industry and even the financial markets.

Although accountants have a great deal of responsibility to their clients, if the Internal Revenue Service finds an error in an individual's tax return, it does not hold the tax preparer or accountant responsible. Rather, the IRS adjusts the return and holds the taxpayer responsible for the additional tax, fees, and penalties. However, an individual who has been wronged by an accountant's misconduct can bring a claim of negligence against the accountant based on the fact the accountant breached his duty to the client and caused personal or financial damages.

The IRS also accepts complaints about tax return preparers who have committed fraud, and anyone with an issue may submit a complaint using Form , Complaint: Tax Return Preparer. In-house accountants who cook the books or purposefully include erroneous data in their company's tax returns or accounting documents are responsible for misconduct and may even be criminally liable.

Many business owners forget to track and account for items like depreciation, out-of-pocket expenses and home office space. Another really compelling reason to hire an accountant is to avoid the dreaded audit. The important thing to remember is that an audit can easily be avoided if you get the guidance and counsel of an accountant year-round. Think of an accountant as a long-term partner who is invested in your business and cares to keep it fiscally sound. But if you think about how much time and effort you spend on trying to manage your finances yourself not to mention the possible errors you could incur during reporting, and related losses from poor financial decisions , the benefits certainly outweigh the cost.

As an entrepreneur, your focus should be on running your business. Investing in a professional accountant and engaging him or her as an ongoing tactical business advisor will assist you in maintaining that focus and simultaneously keep you on the road toward your business goals. When I consult business owners, they often tell me that they wish they could easily calculate the potential consequences and implications of making a big office purchase or hiring more employees.

These professionals may also be called cost accountants, managerial accountants, industrial accountants, private accountants, or corporate accountants. Preparing data for use within a company is one of the features that distinguishes a management accountant from other types of accounting jobs such as public accounting.

You'll be recording and crunching numbers for internal review to help companies budget and perform better. You may help the company choose and manage its investments along with other company managers. Management accountants are risk managers , budgeters, planners, strategists, and decision-makers. They do the work that helps the company's owner, manager, or board of directors make decisions.

Management accountants often supervise lower-level accountants who handle basic accounting tasks, such as recording income and expenses, tracking tax liabilities. This information is used to prepare income statements , cash flow statements, and balance sheets , In smaller firms, you may end up performing these tasks yourself.

A management accountant performs analysis to forecast, budget, and measure performance and plans, then presents them to senior management to assist in operational decision making. A management accountant may also identify trends and opportunities for improvement, analyze and manage risk , arrange the funding and financing of operations, and monitor and enforce compliance. They might also create and maintain a company's financial system and supervise its bookkeepers and data processors.

Management accountants may also have an area of expertise, such as taxes or budgeting. The most fundamental skills you need to be successful as a management accountant are an aptitude for and interest in numbers, math, business and production processes, and helping to manage a business, according to Steve Kuchen, executive vice president and chief financial officer CFO of PacificHealth Laboratories.

Management accountants need a solid foundation in hard accounting skills, including knowledge of basic accounting, generally accepted accounting principles GAAP , and basic tax principles, according to William F.

Finally, you'll need leadership and management skills. Less critical but also important is a knowledge of social media , marketing, and sales," he says. All four of the management accountants interviewed say that the minimum requirement for becoming a management accountant is a bachelor's degree.

Knese says a good undergraduate education is important to develop the critical thinking skills you need in the field. Mulling adds that while the typical management accountant possesses a bachelor's degree in accounting or finance, your degree doesn't have to be in one of these subjects to obtain a Certified Management Accountant CMA certification.

The minimum requirement to becoming a management accountant is generally a bachelor's degree. Knese's undergraduate degree is in English. He acquired the educational background to become a management accountant when he completed coursework in economics, business, accounting, and finance as part of a Master of Business Administration MBA program.

Searle says prospective management accountants should expand their studies beyond those of a traditional financial accountant. There are two major professional designations for management accountants. Obtaining one of these designations may help you command a higher salary. You can earn this designation if you complete a bachelor's degree, pass the two-part CMA exam , and acquire two continuous years of professional experience in management accounting or financial management.

The second is the chartered global management accountant designation, offered by the American Institute of CPAs in conjunction with the London-based Chartered Institute of Management Accountants. The credential has only been offered since the beginning of At its inception, the CGMA program offered the credential based on experience alone.

As of , there is also an exam requirement. I value each of these credentials," Knese says. Management accountants often begin their careers as staff accountants to learn the fundamentals of accounting and how a business functions, Kuchen says. Searle notes they may also start out as analysts. They may advance to become senior accountants or senior analysts, then to accounting supervisors to controllers, and to CFOs.

According to Mulling, the career ladder can go in many different directions depending on your individual goals.