Loopholes in Accounting

 

Loopholes in Accounting

Name

Institution

 

 

Table of Contents

1.0 Introduction 3

2.0 Loophole in Accounting 4

3.0 Conclusion 7

4.0 References 8

 

In essence, Accounting rules have been regarded as the foundation of accounting structure. These guidelines of accounting are usually in form of rules, doctrines, tenets, procedures, conventions, postulates and assumption, which bring the uniformity interpreting of accounting. In this regard, a study argues that, accounting rules are the fundamental belief which when established cannot change (Minibiole, 1998). This implies that, the rule of conduct is mostly linked with rules of accounting. In conjunction with this, for any accounting to be valued certain characteristics are required. It must be relevance to the user, it should be objective in the sense that accounting information is not influenced by an individual bias instead, supported by figures and facts. In addition, it should be applied at ease and economically without complexities. There have been controversial debates on whether accounting rules should be bent or not. Some argues that accounting rules should be neutral and not financial rudder to be bent when economic drifts on wrong direction. On the contrary, other argues that the principles can be bent to accommodate the needs of the business without breaking the law. This paper seeks to examine how Accounting rules and practices can be bent to accommodate the needs of the business without breaking the law.

 

Generally, financial accounting relies on specific guides or standards refer as “Generally Accepted Accounting Principle” (GAAP) (Schwencke, 2010). In any financial statement report, the auditor should point out to the reader whether or not the information in the statement compiles with GAAP. For instance, the principle of sincerity states that, any accounting unit should reflect sincerity of the company financial status. According to this principle, all organizations are required to give truthful information to its shareholders, employees, financial institution, management and the government among others. Although this reflects genuineness of a company, it is challenging to disclose information especially when it is operating under loss and in debts to the shareholders. If the information is disclosed to the shareholders, they may end up shifting to other companies who might be operating better for fear of not sharing loss, with the company. However, if this principle is bent, it can accommodate the need of the business. In such case, the company may choose not to disclose the information on how it is operating under loss; instead, they should aim at motivating many shareholders to be part of the company. As a result, it may inspire many shareholders to invest their share in that company and eventually boost its finances without breaking the law.

According to the principle of full disclosure, all values and information of financial position should be revealed in the records. In such a case, if the company financial position is down, the principle indicates that the company should reveal such information in the records. In such a case, the company may opt to substitute this law with the principle of continuity, which delineates that, when giving financial information; one should be presume that the business financial status will not be periodic. This principle allocates that, assets should not be accounted at their disposable value instead; they should be recognized as historical value in the records. In this regard, the company may opt for the principle of continuity for the sake of not disclosing the financial position to the owners of the company. Consequently, it will cover the company image particularly, if financial status is low.

Economist argues that, the General accepted accounting principles that leasehold improvement should be written off over length of lease that include 39 years (Racine, 2010). There are loophole in that when one make leasehold improvement, one can end up allocating a lot of money to personal property for instance, fixtures, equipment which in such incidence may be shorter depreciable. An individual may look for an alternative of having the property owner to incur the cost of leasehold improvement in addition, increase the rent by the same amount together with an interest in the life of the lease. If this done, one will pay the expenses required while deducting full amount as rent without necessary breaking the law.

According to Anthony (2004), the principle of utmost good faith states that, all information concerning the firm should be revealed to the insurer prior to insurance policy process. With this in mind, it means that, the insurer should be equipped with the company information in terms of how it is progress and loss. Ironically, the principle of periodically emphasizes on ensuring that each accounting entry to be allocated at a given period and divided when the client pre-pays the subscription.  The given revenue should not be counted for entirely until the date of transaction. Based on this knowledge, an individual may opt for the latter principle, which in this case regards the firm to disclose its information to the insurer on the date of transaction. This implies that, the firm would not be breaking the law rather it would be looking for alternative of not disclosing its information before insurance policy is taken. This is because; if for instance the insurer discovers that, the business is operating in losses and debts, the insurer may have fear of being insured in cases of certain losses. However if this is done during transactions, it may reduce such fears.

Additionally, under the principle of prudence, the company is required to show financial records but not to include the projected results, which have not been realized. In this regard, this has been a loophole in many businesses since; they are required to present daily financial record and not the results that have not been achieved yet. This may hinder many from predicting their financial outcome in the future compared to present. The company may look for an alternative of comparing the financial information achieved by the company and examines whether it is coherent in making progress in future, which align with the principle of permanence of methods. This implies that, keeping records will not be exceptional but rather it will help predict the future outcomes. In such aspect, the firm will not have broken the law but rather the law would be bent to suit the need of foresee the future achievement.

Still under the principle of prudence, the firm is required to show the reality of financial information. Typically, the company should not make things appeal better than they ought to; in addition, revenues are required to correctly stated. This implies that, when the firm is in debts or in cases when profits are declining, the company may follow the principle but may opt to explain why the businesses profits have declined; and promise the shareholders that the financial status will shoot. As a result, the firm would not have broken the principle instead; implementations on giving explanation on financial information would have been achieved. As a result, many shareholders will be aware of the company challenges.

 

 

 

Conclusion

            As discussed in this paper, it is worth noting that, Accounting professional requires set of principles and rules that assist on setting guidelines on how things should be done for effective running of business. These norms and regulations assist the Accounting professional, country, employees, shareholders and everyone linked to business set up in making effective decisions and successful business results.  Some of these principles include Principle of sincerity, permanence of methods, continuity, non-compensation, full disclosure and principle of utmost good faith among others (Scot, 2010). Nonetheless, since many businesses vary in needs, many have opted to bend the principles without necessary breaking the laws. As discussed above, the principle of sincerity emphasizes that; the business should be honest to the shareholders, employees, financial institution, management and the government among others. As said earlier, the company may opt to give information on what may have caused the loss without necessary breaking rule.

The paper has also discussed how a company may substitute principles with a different principle. For instance, in cases when the principle of utmost good faith is challenging the firm may opt for the principle of periodicity, which seems to agree on the fact that all information regarding the company should be revealed to the insurer after insurance policy process. With this in mind, the paper has examined how Accounting rules and practices can be bent to accommodate the needs of the business without breaking the law.

 

References

Anthony, R.N. (2004). Rethinking the rules of financial accounting: examining the rules for           proper reporting. New York: McGraw-Hill Professional

Minibiole,E.A. (1998). Accounting principles. New York: John Wiley and Sons

Racine, S.F. (2010). Accounting Principles. Washington DC: Read Books Design

Schwencke,R.H. (2010). Accounting for mergers and acquisitions in Europe: a comparative          study from an IAS perspective of accounting rules in Germany, the UK and three Nordic          countries. California: IBFD Publisher

Scot, L. (2010). The Simplified Guide to Not-for-Profit Accounting, Formation & Reporting:          New York: John Wiley and Sons

 

Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.

[order_calculator]