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A Letter From Jail Accounting Essay

Computer Associates International, Inc. (CA) is a software company which provides software products for business. In the case, according to the Generally Accepted Accounting Guidelines, revenues for the program licensing should be known once a agreement was signed, the program was shipped, and payment was reasonably promised. In Computer Affiliates, when the revenue recognition guidelines were attained, it recognized the complete value of the licensing revenues quarterly. However, from the fourth quarter of the fiscal season 1988 to the next one fourth of the fiscal yr 2001, Computer Affiliates has backdated some contracts and allows it accountants to record these contracts in the present financial statements. Relative to the Generally Accepted Accounting Concepts, these agreements should be recognized within the next quarter. The future revenues that have recorded in the present financial statements lead to the bigger profits and give back on investments currently. What Computer Associates does indeed is in the violation of the Generally Accepted Accounting Key points. What Computer Associates haves done is some sort of honest elitism and moral parochialism. Moral elitism means that it's significant to maximize the eye of the top stratum or the elite regardless of what to scarify and the ethical parochialism refers to that it's important to protect the interests of the individual's 'in-group'. The professionals of Computer Affiliates take their work to identify the revenues against the Generally Accepted Accounting Principles in order to protect the trustworthiness of the business and meet up with the analyst's estimation and make the investors confident to the business. However, the shareholders and shareholders cannot make a great decision by using the improper financial assertions.

In the truth, as the previous senior director of the Computer Affiliates, Richards make an effort to defense contrary to the crime which makes him in prison. Richards considers that Computer Affiliates lacks of the information to justify whether the accounting operation in Computer Associates is legal or not. As to him, it isn't a big deal for carrying out this and it is merely a timing issue in the revenue reputation. Nevertheless, the revenue acknowledgement in Computer Associates is contrary to the Generally Accepted Accounting Ideas. Computer Associates registered the future revenue in the current financial statements to make the company seems to be profitable. The main function of the financial assertions is to show how the company operates and provide the info about the business to the managers and traders. The financial claims will be the tools in assisting the professionals and investors to make the decision. Computer Affiliates cloud the traders and shareholders about its correct sales income within the existing quarter. By using the inaccurate financial claims, strategies and investment are made incorrectly.

From the Display 4 in the case, the percentages that properly registered earnings was inflated by improperly accelerated earnings in every one fourth from 2000 to 20001 were all above 10%. Moreover, there are large variations between the declared EPS and EPS without improperly identified revenue in every one fourth from 2000 to 2001. The announced EPS were much higher than the EPS without improperly recognized revenue. Assessing to the analyst EPS believed, Computer Associates cannot reach the analyst EPS approximated without improperly recognized income which is discussed earlier. To make the financial assertions more profitable, Computer Affiliates use the improper recognized revenue method to make the company seem to be more profitable. It is unethical for Computer Affiliates to make use of 'allowed accounting versatility' because of its revenue acknowledgement.

What is accounting versatility? Accounting flexibility identifies the process that the accountants use their knowledge of accounting guidelines and standards to manipulate the numbers in the financial statement in order to meet some specific purposes. It is about the change of the statistics in the financial studies from actual information to the number which were needed by the preparers, by taking the features of the accounting rules and benchmarks. (Naser, 1993). It can help the management to control the reported information to be higher or lower. Types of accounting criteria which may use accounting versatility are as follow:

The revaluation of the possessions. While in estimation of the belongings' current value through the depreciation, the estimations are usually made inside the business. It is subjective for the business to estimate the worthiness of the possessions. The management gets the opportunity to estimate the value privately of extreme care or optimism. When doing the estimation in the worthiness of the property, it refers to the change of the resources, depreciation expenditures and the impairment loss. Therefore, the way of measuring of the property and income change.

The fair value popularity of the plan asset. Corresponding to IASB, good value is defined as the market-based value. It means that the fair value of the plan asset is on the basis of the market transaction. it could be manipulated. When changing the reasonable value of the plan advantage, changes will be noted in the financial statements.

Q2. Richards mentions how difficult it is to use in the "grey regions of accounting" and indicated that he could have benefitted from more advice from senior management. Critically point out who in a outlined firm is accountable for this content of the ultimate accounting reports.

Corporate governance is the operations, structures and information designed to use for coordinating the relations in the management of the corporation. It guarantees the efficiency and the accountability for the system in the organization to safeguard the passions of the shareholders. Good commercial governance can help the company to produce good firm culture. The organization culture creates through the procedure of the management practices and principles which directly come from commercial governance.

As in the business, the tasks of the major office holders are as follow:

Implementing the strategy of the business to help make the company procedure in the healthy way.

Advising the mother board about the constructions of the company and making certain the quality and the quantity of the staff in the company.

Providing the accurate information about the company to the panel and making the correct prediction for the company.

Preparing the accurate financial claims within the Generally Gccepted Accounting Principles

In the company, the management should take the responsibility for the accounting accounts which is in accordance with the IFRS followed in Australia. The management should make sure the financial assertions are fairly present the financial position and shows of the company. Furthermore, management must promise the financial assertions with the accounting requirements and prevent these to being fraud. In IFRS 8, management must consider that 'the most recent pronouncements of other standard setting up body that use an identical conceptual framework to develop accounting specifications, other accounting books and accepted industry techniques'. Even though accountants make the financial assertions in company, the management can determine in what ways the budget illustrate and whether make changes in the financial statements. In conclusion, the management is in charge of this content of the ultimate accounting records.

In Computer Affiliates case, as a senior manager, Richards didn't take his duties to improve the manipulation of the revenues in the financial assertions and applied to the sales-driven culture in Computer Associates. He paid more attention to the sales and the revenues in the business. Therefore, with the support of the management included Richards, the improper revenue reputation method was executed in the company.

As for me personally, possible alternatives can be taken as follow:

Changing the accounting plans. The company can use the legal way to manipulate the revenues. For example, Computer Associates can transform the depreciation calculation and change the allocation of the study and development bills within the Generally Accepted Accounting Key points to lessen the expenses so the gains can be higher.

Changing enough time of the deals. It is ideal for delaying the bills and the expectation of the income, that may avoid fighting illegal and the accounting standard.

Changing the conditions of manipulation. Within Generally Accepted Accounting Key points, some other conditions relative to the profits of the company can be manipulated in legal ways. For example, the computation of the doubtful debt and allowance for uncollectible accounts.

Changing the shutting date coverage of the sales aim for. Since it is mentioned in the case, the clients use delaying practices to negotiate with Computer Associates to have the better package. Large proportions of the agreement are booked in the ultimate week of the quarter. That makes Computer Affiliates hard to recognize these contract in today's period and it makes Computer Affiliates to backdate the agreements. Changing the closing date insurance plan of the sales goal is helpful. Computer Affiliates can short the period for the sales goal. For example, it can be closed monthly so that the agreements can be identified with time.

Q3. Consider management's incentives and alternatives in their actions. What are Computer Associate's motivations to manage income and the financial ratios as represented in the accounting claims?

Internal motivations

As Richards mentions in the letter, the company culture in the Computer Affiliates is a 'sales-driven culture'. It means that the more you sell, a lot more commissions you can get. The culture leads the business to be hostile in operation. The goal of the company is to make income as it can such that it can boost the shareholders' benefits. In addition, the compensations of the executives are based on the sales. The executives would have high compensations when sales associates reach the goals. Regarding to a report of Massachusetts Institute of Technology in 1983 by Healy, there is a high probability for choosing and changing accounting procedures in a sales-driven culture with extra schemes. It is easily to control the accounting information to increase the bonus offer awards. The analysis also that it's high incidence of voluntary changes in accounting procedures in years following a adoption or modification of the extra praise plan. In Computer Affiliates, it is so appealing to receive the high level of compensations by manipulated the earnings. What is more, in Computer Associates, performance in business is a essential criterion. Non-performance is not suitable available. Performance in non-revenue areas should be paid less attentions. To be able to succeed, it is fair for Computer Associates to control the improper income.

External motivations

The main reason for Computer Affiliates to control the earnings is to meet up with the expectations of the marketplace. According to the research of Kasznik and McNichols, the consequences of not getting together with the anticipations lead to lessen future income, lower share price, lower market superior and penalization of the marketplaces. Therefore, for Computer Associates, the motivations in order to meet up with the expectations can be concluded as follows:

Future earnings. It really is about the stakeholders. The Computer Affiliates needs to improve its reputation in their stakeholders, such as marketers and customers. High revenue in the financial studies make the stakeholders well informed for the company. Therefore, the stakeholders wish to do business with the business.

Share prices. Based on the research of Amat, Blake and Dowds, the accounting flexibility can help to boost the share prices of the business and make the company seemed to less hazards for the investors. From the Show 4, it is apparent to see that the EPS without improperly revenue recognition is much lower than the expectation. That means the market will reduce the talk about price for Computer Associates as a result of low revenues. In order to change the situation, Computer Affiliates should manipulate the profits to meet the expectations to keep or boost the share price so the self-assurance of the traders can be increased.

The analysts. As it is mentioned in the case, buyers gain information about assets from the analysts rather than the company. The main method which Analysts accumulate the information about the business is to analyze the financial studies. If the company fails to meet the expectation of the marketplace, the analysts will doubt about the company's future revenue and the reliability. Computer Associates do not need to help make the analysts feel doubtful about the business's development so that it tries to control the income to meet up with the expectation of the market segments.

Q4. All issues related to income eventually impact the calculation and identification of income. Making specific reference to the In depth Income Job initiated by the International Accounting Standards Panel (IASB), carefully outline the idea of income that is suggested by this task and the major issues outlined.

According to IASB, income identifies the increases in the huge benefits in the accounting period in the form of boosts of the assets or the decreases of the liabilities which lead to the upsurge in equity. Detailed income is the changes in collateral in an interval of ventures and other occurrences and circumstances from resources which are not owned by someone. All of the changes in equity should be included in comprehensive income while the investment by owners and distributions to owners should be excluded. Comprehensive income is the amount of historic deal income and unrealized fair value of the other items. For the ancient exchange income, it identifies the entity's income during an accounting period which relative to the company's procedure. In IFRS 13, reasonable value is the worthiness which is often received when offering the assets or paying to transfer a responsibility in fairly transaction between knowledgeable and willingness people. Fair value measurement defines as a market-based measurement which is not an entity-specific way of measuring.

Hard income identifies budgeted income that needs to be recognized through the operations and soft income is the real income which recognized after the procedure.

In 2004, a Joint International Working Group on Performance Reporting was set up (IASB 2004a). It is helpful in Broad Income Project to determine the specifications of the extensive income demonstration in financial reports. (IASB 2005b) In depth income requires the entity to present every item in accordance with income and expense through the period. A unitary or two claims are accepted. If the Accounting Handbook 2009 premiered, the definition of comprehensive income was publicized. However, income assertion was still useful. Therefore, there's a confusion that as the income statement is useful, it appears the thorough income approach is quite inconsistent. The detailed income requires all the changes in the earnings and expenditures and the disclosure items haven been improved.

Q5. Critically review and offer an overview summary of a minimum of at least two (2) academic research papers that asses the price relevance of detailed income. Show how this research may have affected subsequent produces and changes in focus by the IASB.

In the study of Biddle and Choi, they centered on the question about the fundamental explanation in accounting, the detailed income and the concern of IASB in accordance with the question. In order to justify those issues, information content, predictive ability and executive compensation contraction were used to look at. The study drew a summary that different meaning of income makes different decisions and applications and disclosing separately comprehensive income components is useful for making decision. This study is the first study to examine this kind of concern.

Another research which acquired done by Cahan, Courtenay, Gronewoller and Upton, advised that, somewhat complete income more value relevant than net income. Nevertheless, when doing the asset revaluation increments and forex translation, the result of complete income was fragile and there is no advantage in reporting the independent components of detailed income. To conclude, as for the authors, in the thorough income methodology, some information was unproductive, which lead to the complete income didn't really advantage the investors.

As in a study of comprehensive income, Hanlon got the similar opinion with Cahan, Courtenay, Gronewoller and Upton. In Hanlon's research, he mentioned the value relevance of mandated thorough income disclosures and talked about whether to choose reported in detailed income basis or reported in net income basis. He found that there is no evidence to aid the worthiness relevance which would be influenced by the thorough income. Thus, he advised that components of comprehensive income were not really value relevant after the controlling for the net income.

From my viewpoint, after reading three essays above, IASB need to focus more on the uses of comprehensive income which IASB makes the entity to survey. There are several differences between the several situations such that it leads to different adoptions. Income recognition is quite intricate. IASB must do more researches to determine whether to make use of the thorough income strategy or not when facing different situations.

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