I conclude that although the abuse of the profession by investment institutions aggravated the financial crisis, accounting cannot be said to be a root cause. Second, I look at the potential of accounting to help with the resolution of the financial crisis. I argue that by enhancing the accounting standards and acting to eliminate weaknesses therein, accounting can play a significant role in aiding the global economy to recover. Several allegations have been made against the accounting profession, accusing it of precipitating the financial crisis. Of these, I believe two in particular depict the role of accounting in the financial crisis, these being the effects of fair values and the overly complex (and thus allegedly detrimental) nature of financial reporting.
Executives are hired to act as fiduciary agents of their stockholders for the purpose of increasing wealth (Smith, 2003). He argued that CSR amounted to spending the stakeholder’s money that clouded decision making by reducing the firm’s focus on maximizing profits, thereby placing the firm at a competitive disadvantage (Smith, 2003). Friedman’s approach is practical and takes into account the interests of both firms and society. However, it is not realistic to think that a firm can separate business and social responsibilities. According to Mintzberg "the strategic decisions of large organizations inevitably involve social as well as economic consequences, inextricably intertwined...there is no such thing as a purely economic strategic decision."
Top executives of companies are hired to improve performance and the pressure to do so can lead them to take unethical action to ensure their success. Publicly traded companies are consistently pressured by internal and external stakeholders to perform at higher level. When organizations are about to release financial reports that would possibly lead to a financial loss to the shareholders, the pressure to perform unethical accounting practices will increase. There is an opportunity to adjust the numbers so the financial reports will represent a more desirable outcome. Employees have the same opportunity to perform unethical accounting activities as the top executives.
Company mainly focused on maximizing the shareholder value by the CEO and other management’s managerial philosophy. Currently, Hill Country uses a risk adverse strategy to choose their business or project. Hill Country’s industry is high competitive but it kept going well with cost efficiency and quick reaction to customer requirements. From these reasons, Hill Country has few risks. However, analyst and experts present that Hill Country’s excess liquidity with zero debt is going to lose benefit and fail to maximize the shareholder value.
People would accept this as long as they could see that the system was fair. Conflict might occur but it could be controlled by socialisation. Socialisation was the process whereby shared values could be passed from one generation to the next. At the time Durkheim was writing he argued that education, the family and religion were three of the important agents of socialisation. Disharmony might arise when people felt the system was not fair, for example, when large bonuses are paid to bankers during a recession.
While this financial metric has become popular as a measure of profits and as a measure of corporate health and value, it has also been very polarizing in how it is viewed in certain circles. Some regard it as an accurate indicator of value, while others regard it as a “fairy tale told to investors and credit managers so that they go to sleep happy instead of running for the hills.” I have been asked by the President of my engineering firm to look into this metric and gather a better understanding of what it can mean for us in analyzing the health of our own company. In the pages ahead, I will analyze the PROs and CONs of using EBITDA, and will also present some differing viewpoints held currently by the experts. By several accounts, the use of EBITDA became increasingly popular in the 1980s. It was used originally as leveraged buyout investors examined distressed companies that needed financial restructuring.
Because earning management allows managers to reach their desired outcomes by influencing firm’s financial statements. According to Graham, Harvey and Rajgopal (2005), it is acceptable for senior mangers to use earning management so that they can provide positive and steady earning growth for the firm. In addition, the reputation of a CFO or CEO depends on whether the company they manage has a good prediction of future earnings. The labor market will regard a CFO as a “managerial failure” if the CFO perceive inability to reach the earnings target. In this case, the managers were encouraged to do their best and spend whether it was necessary to bring revenue.
In our current economic climate, the Keynesian model of economics is more accurate. Business owners operate their business outside of government control and without much thought to the economic situation. Their goal is to build revenue and raise net worth of their company. With this being said, prices are in fact “sticky”. Even though the prices will lower of time, companies will take advantage of the recession, knowing that consumers still require their goods, no matter if it falls outside their budget or not.
Creative Accounting Accounting practices by Enron could be considered nothing less than creative. Enron managed to cause the California energy crisis and inflate energy costs to benefit the company’s bottom line. Further, Enron’s accounting practices changed public opinion on the dealings of corporate America. “A continual stream of revelations about Enron's deceptive financial reporting has played a decisive role in making investors wary of corporate accounting and the stock market,” (Mandel & Zellner, 2002). Investors no longer had trust in financial or accounting records and reports.
DVR Tutorial Question 2 Case Study : Taking Responsibility – Union Carbide and Bhopal disaster 1) Does the corporation owe its first loyalty and moral responsibility to the financial interests of its owners or the local community and its employees who are affected by its operations ? The corporation does owe a bit of its responsibility to the financial interests of its owners but it owes its first loyalty to the local community and its employees . This was not shown because Union Carbide US didn’t want to take responsibility . In seeking to assign responsibility for the incident ,pressure from the corporate office to stop losses backed Union Carbide India into a corner that led to the cost-cutting proposal to slack off on safety measures that ultimately produced the disaster. As Milton Friedman said, the social responsibility of a business is to increase profits, then Union Carbide Corporation’s decision to approve the cost-cutting plan seems appropriate and acceptable.