Before more advanced reasons. After studying the module, my

 

Before
studying Accounting in Context, I believed that the accounting profit figure
may not always be a measure of the true profit figure. I still support this
statement that I made in Part 1 of the assignment, however, it is for more advanced
reasons. After studying the module, my views had been challenged and ideas
about whether true profit really exists have changed and been developed.

 

In Part
1 I wrote about how accounting profit may not always be the same as true profit
because of the estimates used in preparing accounts; through the use of
accruals and prepayments (Sivakumar,
2017). I learnt about the International Accounting Standards Board (IASB)
in Accounting in Context and about the standards in detail in Financial
Reporting 1, such as IAS 1; Presentation
of Financial Statements. It was then I understood why accruals and
prepayments were necessary. These estimates ensure that there is good
information about the financial health of the company. For example, an invoice
in 2018 for the year 2017 should be accrued for its financial year so that the
company presents its financial statements for that year (Harvard Business Review, 2009). Once we have prepared all accruals
and prepayments, only then can we be sure to get the accounting profit figure.

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Positive
Accounting Theory is concerned with predicting such actions as the choices of
accounting policies by firm managers and how managers will respond to proposed
new accounting standards (Millo, 2017). Watts
and Zimmerman’s theory suggests that all individuals’ actions are derived by
self-interest and that individuals will always act in an opportunistic manner
that will increase their wealth. The concept of morals is not incorporated into
the theory.

 

The International
Accounting Standards Board (IASB) has a mission to develop IFRS Standards that aim
to bring transparency, accountability and efficiency to all financial markets
around the world (IFRS,2017). The IFRS
Standards are mandated by law in 116 jurisdictions, while 12 more permit the
use of IFRS for registrants on regulated markets. However, not every company abides
by these standards. Some organisations may prefer to comply with alternative accounting
standards so that their financial statements look as healthy as possible.

 

In 1988, Hines said that “we recognise
revenue when it is realised and by naming it revenue, it becomes revenue…just
like black holes”. Concepts such as revenue and profit are the creation of
accountants, what they are depend on how we define them. As a result, revenue
may be recognised differently between accountants, as standards may not be
identical. This is likely to lead to a disparity between the accounting profit
figure and the true profit figure. This is such in the case of Anglo-Swedish
drug company AstraZeneca who reported a profit of £9,521 million under UK
accounting rules and £29,707 million under US accounting rules (Deegan and Unerman, 2011).

 

The UK
and US have high levels of professionalism so the concept of ‘true and fair
view’ mirrors on the professional judgements of the accountants as a liberal professional.

Wyatt A.R. (2004) argued that providing
services in a skilled manner used to be the aim of US audit firms. On the
contrary, firms in the 1960s began to focus on generating as high a revenue as
possible; because maximising profit has become part of the culture. The Enron
scandal is an example of this; judgements permit creative accounting and this misrepresents
the purpose of accounting and results in a lowering in the public’s confidence on
the integrity of the accounting profession. As a result of the Enron scandal,
the Sarbanes-Oxley legislation which helps to prevent investors from the possibility
of fraudulent accounting activities by organisations, was introduced in 2002. Although
the UK and US are countries with high levels of professionalism, there will
always be differences in the regulations in both countries. However, Hoogervorst and Prada (2017), Chairmen
of the IASB and IFRS Foundation, say that perfect objectivity is aspirational
and hence impossible to attain. Therefore, we will see differences in the
financial statements of companies depending on the standards used. It was
argued that under UK accounting regulations these liabilities would not have
been treated as off balance sheet, thus potentially producing significant
differences between Enron’s balance sheet under UK and US accounting practices (Deegan and Unerman, 2011). From this
it is clear that countries, societies and organisations should all adopt the
same standards and regulations when preparing accounts and financial information
so that all information follows the same guidelines and therefore ends up with
the same figures so matter the accountant that produces the accounts. This is
when the accounting profit figure will be a measure of the true profit.

 

In conclusion,
the true profit of an organisation is obtained when every accountant in all
countries in the world can produce accounts of a firm and end up with the same
profit figure. This is when we have true profit. Therefore, the question to ask
is, what can we do to make sure all standards and regulations in every country
regarding the accounting are the same. The IFRS Standards where standards are
currently required are in over 150 jurisdictions (IFRS, 2017), and the IFRS and IOSCO have a common interest that IFRS Standards should be consistently
applied in practice across varying national contexts and settings (IFRS, 2017). However, the term ‘truth’
is an abstract term. The truth is constructed, rather than being seen (Hines, 1998). Therefore, truth varies
differently depending on the individual. The accounting profit figure may be a
measure of true profit to a certain extent. However, the figures are vastly
affected by the judgement and subjectivity of accountants with contrasting
aims, thereby altering the true profit. It is also affected by factors such as
cultures and regulations in the country.