Chapter 14: Emerging issues in accounting and auditing QUESTIONS 1. What is XRBL? What are the arguments for and against disaggregation of data in financial statements? XBRL = Extensible Business Reporting Language. It is a process of tagging individual data items within a company’s financial report. It allows software applications to source the required piece of data to produce custom designed reports for users. Essentially, instead of relying on a company’s statements of financial performance and position, users are able to create their own reports. In favour of disaggregation of data: Users interested in calculating profit including or excluding specific items, can produce such reports easily using the raw data rather than working backwards from the company reports. This allows easier comparisons across companies and time periods. Ease of access to the data encourages more users to analyse the data in greater detail. This encourages the use of the data and makes the financial data more valuable. If greater numbers of users investigate a company’s financial reports, it is more likely that any errors or other problems are discovered, and they are likely to be discovered more quickly. This will assist the SEC investigate the relevant companies. If there are more users of the data, it is likely that there will be more investors, increasing the market liquidity for that company’s stock. This has positive effects on the ability of companies to raise equity capital, increasing the depth of the financial markets and the speed of obtaining finance for new projects. Against disaggregation Accountants are experts in making judgements about the relevance of particular pieces of data to each other. Thus, aggregation decisions should be made by accountants. If novices try to organise and aggregate the financial data, they are likely to make mistakes, decreasing the usefulness of the financial data. Aggregation of data creates meaning, if this is not done, financial statements will be less useful to decision makers, meaning that fewer people will use the information, decreasing the chances of fraud detection, stock market liquidity etc. 2. “I do not know of any auditing regulation that originated in a research study.” What does this statement mean for the relationship between auditing research and public policy? This statement reflects the view that regulations are not based on research but are promulgated for other reasons. These other reasons could include a search for popularity by politicians. That is, if a regulation is likely to be perceived favourably by the electorate, the politician will be motivated to introduce it, regardless of its likely effects on the affected parties. The debate surrounding the effects of the Sarbanes-Oxley Act’s restrictions on non-audit services can be used as a context to discuss the issues. For example, audit fees and nonaudit service fees were not disclosed in the US prior to 2000. SOX was introduced in 2002, very quickly after the collapse of Enron and Arthur Andersen audit firm. Early research evidence supported the SOX regulations but later evidence did not. In addition, there appeared to be no evidence from other countries to support the regulations. Overall, auditing research has the potential to influence public policy, but the level of its influence is likely to be affected by other factors and politicians’ incentives. 3. What is the Global Financial Crisis? Why has it created intense discussion about accounting for fair values? The Global financial crisis refers to the problems in the equity and debt markets around the world, including falling share prices and difficulties facing companies wishing to borrow. Prior to the GFC, there was a rapid and dramatic growth in lending (mainly in the US, but including other countries) for the purchase of houses to borrowers with lower levels of documentation and security (subprime mortgages). These loans were securitised and sold on the financial markets to institutional investors. It is claimed that the securities were sold with incomplete information about their risk, or without regard to their default risk because it was believed that the mortgaged properties could be sold easily to repay the debts. As borrowers defaulted on their repayments, the value of these securities fell and banks faced considerable difficulty selling the houses for their estimated values. Mark to market, or fair value accounting, requires the securities and the associated financial instruments to be shown on the institutions’ balance sheets at fair values (where they were not held off balance sheet through various complex arrangements). As the problems spread, there was greater uncertainty about the asset values and more entities faced difficulties caused by either the loss of value of the subprime mortgages, or the loss in value of institutions that owned the securities. The chain reaction in write-downs caused loss of faith in fair value accounting. Many opponents of fair value accounting claim that it has made problems worse. Sound companies are unable to borrow because either their own balance sheets are affected adversely by write-downs, or because banks are suffering and so reducing their lending to all companies. The supporters of fair value accounting claim that it has simply made the existing problems more transparent, increasing the likelihood of a speedy resolution. Ignoring fair values would mean that reality is being ignored, and problems loans would continue to be made. 4. What specific issues does the Global Financial crisis create for auditors? Auditors face problems in assessing managers’ valuations of assets and liabilities. Financial assets and liabilities are directly affected by the problems in the financial markets. However, other asset values are also potentially affected if they relate to business operations that are suffering because of the recession that has followed the crisis on financial markets. In addition, information on market values for all assets is difficult to verify when economic conditions are changing at a rapid rate and regulators are responding to situations with new laws and assistance packages. Auditors must also gather evidence on the going concern assertions by managers. Where companies are facing significant problems doing business during the recession, there are likely to be significant doubts about the entity’s ability to continue as a going concern. The auditor has to assess the plans made by managers to deal with the adverse events in financial and product markets. Pressure on company managers to avoid adverse effects could increase the risk of financial misstatement, either deliberately or otherwise. Auditors need to be alert to such pressures when assessing the risk of fraud. 5. What are the latest pronouncements from the IASB and FASB on fair values? Get updated information from the IASB and FASB through their websites: http://www.iasb.org/Home.htm http://www.fasb.org/ Also, check the websites for relevant national standard setters, for example, the Australian Accounting Standards Board http://www.aasb.com.au/Home.aspx 6. Leon Getter wrote in a recent article: ‘As former analyst Henry Blodget points out, the US is adopting the model used by Japan in the 1990s when it refused to acknowledge its banks were insolvent and pretended they were healthy. History, as Mark Twain said, does not repeat itself, but it rhymes. The G20, banks and standard setters should remember this: to borrow from Winston Churchill’s line on democracy, fair value is the worst form of accounting except for all the other forms that have been tried.’ (Getter, L. ‘Standard-setters rendered toothless by G20’, The Age BusinessDay, (April 15, 2009), p. 14.) (a) Does fair value convey ‘reality’ better than any other form of valuation? (b) Is it better for banks to report stable asset values or to provide information about those assets? What are the arguments for each view? (a) The article is referring to the situation in the US in early 2009 when the regulations surrounding the use of fair values were being changed. Banks were permitted to use their own judgement to value assets, rather than a strict applicable of market values. This was done on the basis that the turmoil in financial markets has made fair values unreliable. The author is drawing parallels between the situation in 2009 and the circumstances in Japan in the 1990s when the Asian financial crisis affected asset values in that country. The author believes that attempts to allow banks to avoid recognising the fall in asset values in those circumstances actually prolonged the recession. The author appears to be of the view that fair value conveys reality better than any other form of accounting measurement – asset values have fallen, fair value accounting recognises this reality and conveys the information through the financial reports to the broader financial system. Students could discuss the competing arguments, primarily, whether the market values are ‘real’ in the sense that the particular asset being valued has not been sold, so any value arising from an actual sale is not relevant to an unsold asset. They could also consider the arguments that market values in this type of situation are ‘temporary’, in that if you valued an asset one day you would get a very different valuation than if you valued it on another day. (b) Banks are arguing in favour of stable asset values, such as historical cost, or values produced by another valuation system. Stable values don’t allow temporary market fluctuations to impact on real decisions, such as borrowing money and buying property. The opponents are arguing that market values are information and as such, are useful to decision makers. If someone wants to lend to a company they can still make that lending decision knowing that market values are currently low. The problem is that lending regulations make this difficult for banks to do, so the valuation and lending decisions are unable to be separated. 7. What are the arguments for and against convergence between the FASB and the IASB? Convergence would produce one global accounting standard setter, meaning that there were no differences in accounting standards used around the world (or at least the US and the part of the world following IFRS). This would make it easier for companies to cross-list and raise capital in different countries. All lenders and equity providers would use the same set of financial statements to assess the company, reducing companies’ reporting costs. However, if there is only one standard setter, there is no possibility of using a more suitable set of standards by shifting company domicile to another financial market. At present, if a company does not like IFRS, it can seek to register as a US company, and vice versa. One single standard setter also means that there is no competition between standard setters, thus losing the potential advantage provided by competition on seeking to improve the quality of standards in order to attract ‘customers’ (ie companies choosing to use the standards). There is a danger that one powerful interest group can get control of the standard setter and encourage the development of standards that promotes its view of the world (or deny views of the world held by its opponents or any other interested party). A key issue in standard setting is the enforcement of those standards. At present, there is doubt about the ability of the IASB to enforce its standards and to avoid political influence. In the US, it is sometimes argued that the US Congress (ie politicians) place pressure on the FASB to produce a politically acceptable set of standards. The proper role of governments in accounting standard setting can be debated. 8. Is it important to harmonise both accounting and auditing standards around the world? Why? The IASB and IAASB are separate bodies with different influences, although ultimately both are interested in the quality of financial statements. To the extent that auditing standards around the world differentially emphasise compliance with the rules in accounting standards and presentation of a true and fair view, there will be differences in approach by auditors to the audit of the financial statements. Therefore, there are some difficulties in having a unified set of auditing standards when there is a unified set of accounting standards which the standard setters are hoping will be interpreted in similar ways around the world. A harmonised set of auditing standards would complement the harmonised accounting standards, and the IAASB and IASB are currently working together on a common approach. An alternative view is that one set of auditing standards would face the same difficulties as one set of accounting standards, that is they would potentially be dominated by a particular interest group, and there would be no competition to find the best set of standards. 9. What is sustainability reporting? How does sustainability reporting relate to social accounting? Social accounting is a combination of accounting for different things, in different media, to different users, for different purposes (refer to Gray, Owen and Adams). It goes beyond financial measurement of economic events and reporting to a defined set of users, in accordance with accounting standards and regulations. Sustainability reporting is a subset of social accounting. It uses non-financial information and recognises non-economic events. It also reports to a broader range of users and uses guidelines and influences beyond the accounting standards. Sustainability reports often report on the entity’s interactions with its community, including customers and other interested parties and those living in regions where the entity operates. Sustainability reports also usually provide information about the wellbeing of the entity’s employees on a number of dimensions, such as health, education, and safety. Sustainability reports also typically include information about the entity’s impact on the environment, including waste, greenhouse gas emissions, and general climate change issues. 10. Why do companies issue sustainability reports? Companies often claim to be motivated by a concern for their environment and the quality of their interactions with various sections of the community, and use sustainability reporting to communicate their concerns, activities, and progress. Others argue that sustainability reporting is an extension of the entity’s public relations department and an attempt to avoid sanction. For example, it is possible to see sustainability reporting as an attempt to minimise political costs. Political costs are those costs incurred by the entity to satisfy government or other organisations’ requirements or restrictions. For example, sustainability reporting might convince stakeholders that a mining company is doing all that is reasonably possible to minimise any potential adverse effects of its operations on the local environment. The report could include data about tree planting to offset its mining activities, and its efforts to provide education for children of local communities. This could be used to convince the relevant governments not to impose new laws in these areas. Other companies could be producing sustainability reports to communicate more broadly information that it is already providing to relevant agencies about GHG emissions etc. There is a low marginal cost of making this information available and greater benefit from conveying more complete information to interested stakeholders. 11. What advantages do companies perceive in obtaining assurance for sustainability reports? In general, assurance provided by an independent third party increases the credibility of the subject matter. The level of credibility depends on the degree of independence and competence of the assurance provider, the extent of work done (evidence gathering), and the scope of the assurance engagement. Overall, the advantages perceived by companies from obtaining assurance for a sustainability report relate to the increase in credibility. More credible reports are more useful in relations with external stakeholders (that is, they are more likely to be convincing as evidence of the company’s performance in the relevant areas). If companies are seeking greater acceptance of their sustainability reports, they are more likely to seek assurance. Therefore, an understanding of which companies obtain assurance requires a consideration of which companies are likely to seek greater acceptance of the sustainability reports. Some examples could include companies that face greater political costs and companies that are seeking to influence public opinion because of more sensitive business operations (eg mining, forestry, etc). 12. Why has the practice of sustainability reporting (and assurance) varied around the world? Some countries have laws that encourage sustainability reporting. For example, if the country requires certain information to be provided to the government and it is likely that this information will be made public, the companies in that country could be more likely to publish the information in sustainability reports so that they can control its release and reap the benefits of their compliance. Some countries have a political environment that encourages or discourages discussion of sustainability issues. Relevant factors include attitudes towards private companies’ use of natural resources, the public’s right to know certain information about the companies in the economy, progress towards an emissions trading scheme etc. Another influencing factor could be promotion of this type of reporting by the accounting profession and other interested parties in that country. 13. Who do you think should be involved in sustainability assurance? Accountants or physical scientists and engineers? Why? Accountants are experts in forming opinions on whether the information presented in reports gives a true and fair representation of an entity’s position and performance and the report’s compliance with the relevant standards. In this respect they are well qualified to give assurance on sustainability reports. However, it could be argued that accountants are not experts in environmental and social impacts and information. In this respect they are not well qualified to assess the reports. It is possible that a team approach is the best solution. Accountants provide expertise on evidence gathering, judgement, and assurance concepts. Physical scientists and engineers can provide expertise on measuring environmental impacts and whether the entity is reporting relevant and reliable information. 14. What is the Carbon Disclosure Project? Who would use the information provided by the Carbon Disclosure Project? Why? The material on the CDP website (see below) claims that it is an independent non-for-profit organisation which compiles a database of corporate climate change information (the largest in the world). The CDP sends a request to selected companies for climate change information. The company’s participation is voluntary. Information is made available on the CDP website and is available to all interested parties. The main users are institutional investors, purchasing organisation and government bodies. In addition to providing information, the CDP’s actions encourage organisations to ‘measure, manage and reduce emissions and climate change impacts’. It provides a focus for an ‘ongoing dialogue’ between institutional investors and senior corporate management on climate change. Carbon Disclosure project http://www.cdproject.net/ 15. What is the Global Reporting Initiative? Is this the same as the Greenhouse Gas Protocol Initiative? The material on the global reporting initiative website (see below) is that the GRI aims to promote disclosure on economic, environmental and social performance. It provides guidance for the transparent and reliable exchange of sustainability information through the GRI Sustainability Reporting Framework. The purpose of the reporting framework is to provide a widely adopted method of reporting organisational performance in a number of non-financial areas. This facilitates comparisons across organisations and across time. The GRI claims that more than 1500 companies worldwide have indicated that they have voluntarily adopted the guidelines, making the GRI guidelines the de facto global standard for sustainability reporting. Global reporting initiative http://www.globalreporting.org/Home The Greenhouse Gas Protocol (GGP) Initiative has a more limited ambition than the GRI. The GGP provides standards for the reporting of greenhouse gases, not all environmental issues, and it is not relevant to reporting of performance on social benchmarks. The GGP initiative also provides a tool for business to manage its GHG emissions and to make informed decisions about climate change. The Greenhouse Gas Protocol Initiative http://www.ghgprotocol.org/ 16. What is water accounting? Why would we want to account for water? The discussion should centre around defining water accounting and analysing the reasons for accounting for water. The Government has proposed the development of water accounting to assist entities with control over water to discharge their duties of accountability of entities, and to aid the management of water resources. For more information go to the Water Accounting Conceptual Framework: http://www.bom.gov.au/water/wasb/wacf-download.php 17. What is a water asset? What is a water liability? How would water assets and liabilities increase or decrease? The Water Accounting Conceptual Framework adopts an accrual basis of accounting for water and defines the elements of the reports using concepts similar to those used in financial accounting. For example, water assets include water or rights or claims to water (similar to the concept of resource in the definition of financial assets). The entity could hold or manage the water (similar to the concept of control of financial assets), and the entity derives future benefits from the water assets (similar to the concept of future economic benefits). Increases in net water assets occur when there are inflows of water or rights or claims to water or reductions in present obligations of the water reporting entity. Example: increase in ground water due to inflows from streams. For more information go to the Water Accounting Conceptual Framework: http://www.bom.gov.au/water/wasb/wacf-download.php 18. What attributes of water could be measured? Who would use information about these water attributes? What decisions would they be making? The Water Accounting Conceptual Framework refers to the process of ‘quantification’, instead of measurement. The framework acknowledges that there are various attributes of water that could be quantified – these include volume, salinity or monetary value. The discussion should focus on what attributes would be useful to different users of the information. For example, is it useful to know that there is a large volume of water without also knowing whether it is too saline for human consumption? When would users be more interested in the monetary value of water? THEORY IN ACTION 14.1 Watch the SEC chairman explain why XBRL is important on Youtube: “SEC chair on XBRL” http://www.youtube.com/watch?v=oYaLeXowl5A (accessed April 14, 2009) (1) Why would XBRL help the SEC detect fraud instantly? (2) What do these statements mean? (a) "The best investor protection is a growing economy and a rising market." (b) “Markets function best when all the information that market participants need is available to them when they want it and in a form they can use it.” (3) Why doesn’t the SEC simply prescribe a chart of accounts for all companies to use instead of devoting resources to developing XBRL? (1) XBRL is designed to allow the extraction of individual pieces of data from financial statements. This means that the user is not so reliant on the company’s form of presentation of the fianncial statements. If the regulatory authorities wish to investigate the details of the financial statements the data are easier to find and manipulate using routines which investigate the relationships between pieces of data within financial statements and across time. The extraction of data and their manipulation can be automated. This could mean that almost the moment the company lodges its financial statements, it can be analysed for fraud. Also, because the data are much easier for all parties to use, it is more likely that a concerned user will alert the regulatory authority to an unusual transaction or set of results. However, if company managers are aware of the SEC’s data investigation methods, they could try more complex methods of hiding their frauds. (2) (a) The mission of the US SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. It is believed that if the economy is growing, jobs will be created, the standard of living of the citizens will improve, and the value of their savings will be protected. Therefore, the SEC aims to promote capital formation to sustain economic growth. A rising share market also indicates the existence of confidence in the financial system and encourages businesses to invest and grow. Further, as more people purchase shares, they are able to assist the SEC do its job, by scrutinising accounts and alerting the SEC to possible breaches of securities laws. Good information flows, including accounting information, facilitates the growing market and is part of the system that protects investors. (b) Refer to chapter 11 and the discussion of capital markets research. The efficient market is defined as one in which prices fully reflect available information (Fama 1970). In this view, information is rapidly impounded into share prices, that is, as soon as information is available it is traded on and the share prices adjust accordingly. So positive information about a company encourages investors to buy at a higher price. Also, the more information that is available, the more likely that share prices are trading close to their ‘true’ price. That is, the price set in the market is a reflection of the expected risk and return of the shares if all participants knew all the information about the company. More information reduces uncertainty about the future prospects of the company, decreasing the risk premium demanded by investors when they are not sure about the company’s prospects. If XBRL makes information more available to more users, it is less likely that some privileged investors (either better educated or better connected) will be able to trade on the information to the detriment of other investors. Increasing confidence in the market encourages more investors to participate, increasing the ‘depth’ or liquidity of the market. (3) One of the reasons cited for the development of XBRL is that companies have ‘idiosyncratic’ ways of accounting and reporting. This means that any one item could be treated in a different way by different companies. Companies are different in their operations, financing, and governance. A pharmaceutical company investing heavily in research and development is different to a bank, which is different to a retailer, and so on. The different companies will be focused on different goals and use different methods to achieve those goals. The accounting systems are a product of these differences. In the video, the SEC chairman acknowledges the difficulty of the task of devising a method of tagging the individual data items because of these different accounting systems. The SEC recognises that companies are different in their operations, financing, and governance and does not want to discourage these differences. It is unlikely that the SEC could devise one accounting system (or chart of accounts) that would serve all the different companies needs. In addition, it could be argued that such an approach would be in conflict with the SEC’s emphasis on helping a growing economy and free market capitalism. 14.2 Ashton Kutcher is fair value’s newest foe http://www.nysscpa.org/blog/2009/3/20/ashton-kutcher-fair-values-newest-foe, accessed March 26, 2009. (1) What is FASB 157? (2) How could an accounting standard cause a share market crash? (1) Summary of Statement No. 157 Fair Value Measurements Extracts: This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The definition of fair value retains the exchange price notion in earlier definitions of fair value. This Statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. Therefore, the definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). http://www.fasb.org/st/summary/stsum157.shtml, accessed April 15, 2009. (2) Critics of fair value accounting (and FASB 157) argue that it is designed to work only in an orderly market, not in a free falling market. In an orderly market it is possible to use market prices (ie the price paid by a willing buyer to a willing seller) as a guide to the value of similar assets and liabilities. In a distressed market, the seller is not willing and is therefore taking whatever price is offered. Under these circumstances the market price is not a guide to the value of a similar asset or liability. If organisations that hold assets or liabilities are not likely to be trading those items, then using market prices from distressed sales creates ‘unreal’ values. Writing down assets using distressed prices means that the organisations (typically banks in this scenario) have fewer assets to support their lending and borrowing activities. They have to halt these activities, meaning that other businesses cannot access funds, so they are forced to sell assets or layoff workers and the cycle continues. Supporters of fair value accounting argue that pretending the prices haven’t fallen doesn’t make the assets more valuable, so any borrowing or lending activities are not supported, making them more risky. It is better to know the ‘truth’ than to keep pretending, even if this causes some organisations (and people) to suffer in the short term, because the alternative is to create even more harm in the long term. 14.3 PwC and IETA, Trouble-entry accounting - Revisited, PricewaterhouseCoopers and the International Emissions Trading Association (IETA), 2007, page 28. (1) Recalculate each company’s financial statements using the following assumptions: a. Each company requires 250 allowances to cover its obligation for the compliance year b. The market price at 31 December 2006 was ₤40 per allowance. (2) Recalculate each company’s financial statements using the following assumptions: a. Each company requires 100 allowances to cover its obligation for the compliance year b. The market price at 31 December 2006 was ₤40 per allowance. (3) Comment on the differences between your solutions and the above example. SOLUTION (1) Figures in GBP Company A Company B Company C Income statement Release of deferred income 3000 3000 Emissions cost 7000 4000 10000 Net result -4000 -4000 -7000 Balance sheet Intangible assets 3000 3000 Liability 7000 4000 10000 Net assets -4000 -4000 -7000 (2) Figures in GBP Company A Company B Company C Income statement Release of deferred income 3000 3000 Emissions cost 2000 0 4000 Net result 1000 0 -1000 Balance sheet Intangible assets 3000 3000 Liability 2000 0 4000 Net assets 1000 0 -1000 (3) The IFRIC approach requires the liability to be measured as the number of allowances to be delivered and based on market value at period end – this results in a higher liability for Company C than the other two companies in all solutions because the price of the allowances has risen. In the original example the net result of Company A and B was the same, but in the new solutions it is the same only in the first case because in the second case fewer allowances are required to be settled than are on hand. Company B recognises an emission cost based on the market value of the shortfall of allowances held. There is no shortfall of allowances in the second case, so there is no emissions cost and no liability. Overall, the greater the shortfall of allowances and the greater the rise in market price, the greater impact on all results. However, if the companies hold allowances at a low cost and they have sufficient allowances to cover their obligation, they can report a positive net result (or at least avoid a negative net result) by avoiding the IFRIC approach. CASE STUDIES 14.1 Accounting & Assurance News Today (ANT) Issue 14 - 9 April 2009 Chartered Accountants ANT [[email protected]] (1) How would you ‘improve standards for the valuation of financial instruments based on their liquidity and investors’ holding horizons, while reaffirming the framework of fair value accounting’? (2) What is the IASB’s constitutional review? What implications does this review have for the acceptability of IFRS? (1) The statement in quotes is taken from the G20 Declaration on Strengthening the Financial System. The leaders of the G20 are recognising the merit of two of the arguments against fair value accounting. First, if there is no liquidity in the market for financial instruments, then the market prices are not useful in valuing similar financial instruments. This is because liquidity means there are many willing buyers and sellers, and the interactions between them are setting a fair market price. If the market is illiquid, then any trades are not likely to fully reflect both sides. For example, if there are few buyers, the sellers must take any price on offer. If there are few sellers, the buyers who need to buy will pay any price in order to secure their purchase. Second, holders of financial instruments claim that their financial instruments are being held to maturity and not for the purpose of trading. If the instruments are being held to maturity (or at least, for a lengthy period) then current market prices are irrelevant for valuation purposes. A more realistic valuation method would be discounted cash flows. However, the leaders of the G20 are also recognising the importance of fair value accounting as a crucial concept in accounting measurement. Given recent statements by the SEC affirming the merits of the fair value method, it is politically difficult for the leaders of the G20 to publicly go against such expert advice and the associated work done to date by the IASB and the FASB on the fair value model. Therefore, the G20 is asking standard setters to find a way to recognise the concerns of the critics of the fair value method whilst appearing to continue with fair value accounting. One possible solution is to create exceptions, for certain assets, certain entities, or during certain time periods. Another method is to allow ‘variants’ on fair value accounting which are effectively a different valuation system with the trade-off of additional disclosures. (This was the option chosen by the IASB in late 2008 when it came under pressure from European banks). United States Securities and Exchange Commission (SEC) Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-to-Market Accounting, December 2008, Washington. (2) The IASB is overseen by the IASC (International Accounting Standards Committee) Foundation. The IASCF is a non-profit non-government organisation. It does not report to any sovereign government, so does not receive the legal backing of a government. This makes the IASB vulnerable to interference and pressure from interested parties, including governments. This is in contrast to FASB, which reports to the US Congress, or the Australian Accounting Standards Board, which is ultimately responsible to the Australian Government. One of the proposed outcomes of the IASB’s constitutional review is the creation of a body which will give it greater ability to withstand pressure from external parties. Its membership is drawn from capital markets authorities from various jurisdictions who have an interest in supporting the development of high quality international accounting standards. See http://www.iasb.org/News/Press+Releases/Press+release+from+IASC+Foundation+Monitoring+Board.htm (accessed April 15, 2009) for details of the IASB Foundation monitoring board’s first meeting. Current progress on the IASB’s constitutional review is at: http://www.iasb.org/About+Us/About+the+IASC+Foundation/Constitution/Constitution+Review/Constitution+Review.htm 14.2 Egan, C. “Authority ‘fabricated’ water data”, The Sunday Age, (March 29, 2009), p.9. http://www.theage.com.au/national/authority-fabricated-water-data-20090328-9evj.html?page=-1 (accessed April 16, 2009) (1) Explain the accusation that the water authority fabricated data. How was it done? (2) What are the difficulties faced by the water authority in providing accurate data? What water attributes are they supposed to measure? (3) Who are the stakeholders in this case? What are their interests? (1) The Southern Rural Water authority has admitted that it has been calculating river flow readings from a measuring station near Sale that does not exist. The readings have been invented because the station supposedly at Swing Bridge, south of Sale, was never installed. The station was supposed to have been installed in 2000, but it wasn’t. The site is at a bridge spanning the Latrobe River at its junction with the Thomson River. Readings for this site have been calculated based on readings taken kilometres upstream at other sites, and then adjusted for irrigation and industry water entitlements. (2) The reading station was supposed to have been installed at a point where the Thomson and Latrobe rivers flow into the Gippsland lakes. The reading station was supposed to be measuring the level of freshwater flowing to Lake Wellington in the Gippsland lake system. The water authority claims the reading station was not installed because of difficulties in splitting fresh water from salt water than comes to this site with the tide. However, critics claim that the technology for making these readings had been available for a decade, so they accuse the water authority of avoiding accurate measurement for other reasons. (3) Water authority – has to meet government guidelines and obligations under the Water Act of 1989 to maintain river flow gauging stations at designation points. State government – political pressures to provide water to irrigators, industry, households and for recreation and the environment. Conservationists and environmental groups – want designated water flows into the ‘internationally recognised Gippsland lakes and wetlands’ Local landowners – need water for irrigation and are relied upon by the water authorities for ‘dobbing in suspected water thieves’. The environment itself ... (the environment is often treated as a stakeholder, even though it’s not a person). Taxpayers and ratepayers who are not getting what they have paid for, and who might be short-changed in terms of the water available to their use (other than irrigation). Infrastructure suppliers who have not had the opportunity to install the station, despite funding being made available. Solution Manual for Accounting Theory Jayne Godfrey, Allan Hodgson, Ann Tarca, Jane Hamilton, Scott Holmes 9780470818152
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