Ethics and Governance
In this report, case study is developed on organization Sunshine Limited, where general manager has approached the accountant named Maria. Main objective of this report preparation is to discretely modify the organization’s incoming profit. Maria has been in dilemma and she is seeking renewal of Sunshine Limited. Depreciation method has been changed to the method of the sum-of-years-digits’ from straight-line method, in spite of knowing that actions are unethical. Therefore, in the concerned scenario, some of the identified shareholders involve customers, suppliers, shareholders, government, general managers, accountant and creditors. It has been ascertained from the discussion that some violation of objectivity along with lack of integrity and transparency are some of the principles that are breached by Sunshine Limited. Discussion of Maria’s role in appointing new depreciation method by changing existing one are done corresponding to impact of AASB 116 and requirements of organizations (Barth 2015).
Governance and ethics is concerned with organization’s morality and investors’ confidence will increase if ethics are following properly. Some of the issues that are violated by organization are as follows:
General Manager has abused senior management of Sunshine Limited because they were involved in gaining personal benefits along with the help of accountant. Impact of devaluation has been depicted in terms of different method of depreciation that is used by organization. Benefits of assets in future can be incurred using different methods. There could be variation of overall depreciation timing due to changed method of depreciation employed by Maria. This might affect shareholder’s decision and this would lead to errors, as there will be changed actual decisions. It is the responsibility of accountant to report any modification made in financial report and representing information in an effective approach. Not performing such obligations would go against the ethics of accountant and violate objectivity (Oliver 2016).
Shareholders should know profitability generated by investments and they are authorized to receive such information. They have the rights to make assessment about their share when there is change in profitability of investments. The fact that Sunshine Limited is changing depreciation method is not disclosed to shareholders so that they are deceived of generating uniform profit. It illustrate that there is lack of integrity and transparency in providing accurate information to investors (Weygandt et al., 2015). Lack of integrity on part of mangers and accountants depicts risks associated with data and financial metrics presented in the financial statements of company.
Violation of objectivity
Depreciation method has changed to method of sum-of-years-digits from straight-line method as illustrated from the case study. Reducing the level of profits in the upcoming years that is from 2018 to 2019 in the aspect of economic slowdown is the main reason for using method of sum-of-years-digits. Following example will assist in illustrating the fact.
Asset costs= $500,000
Salvage value = $50,000
Asset useful life= Five years
Profit of sunshine limited are compared using two different method of depreciation and they are depicted in the table. Profits generated by two methods of depreciation are as follows:
Sum-of-years-digits method of depreciation:
Sum-of-years-digits method = Depreciable base x (Left over useful life/ Sum-of-years-digits)
Sum-of-years-digits = n (n + 1)/2
Sum-of-years-digits = 5 (5 + 1)/2
Sum-of-years-digits (SYD) = 15
Straight-line method of depreciation:
Straight-line depreciation = (Cost of asset – Salvage value)/ Useful life
Straight-line depreciation = ($500,000 – $50,000)/5 = $90,000
Statement illustrating variation in deprecation:
In the beginning years, depreciation amount will increase due to the modification of method of depreciation. However, in later years, there would be decline in depreciation. Reduction of depreciation charges over the years would help in keeping profit levels consistent. The reason for modifying the method of depreciation is to serve the interest of shareholders and this is done in an unethical way. Hence, it can be said that measure taken by accountant of organization is acting unethically and would eventually hamper the reputation of organization. Shareholders are getting duped by this act as they are deceived in terms of uniform profit generation (Braun et al., 2015). Therefore, it can be said that change in depreciation method has been in the good intention for meeting organization’s objective.
Partners and suppliers:
In the competitive landscape of business, some of the critical shareholders are suppliers and government. It is the tendency of organization to develop loyal relationships with stakeholders such as associates and suppliers. Sunshine Limited will be able to develop strategies, common goals and shared vision. In order to deliver maximum value to customers, there needs to be effective collaboration between trade buyers and sellers (Pretorius and Ronan 2015). For avoiding hampering reputation of organization towards customers, it is expected that trade partners are operating ethically.
Customers:
The immediate shareholder that should be considered by Sunshine limited is its customer. Long-term financial success of organization is ensured by development of loyalty and retaining programs. Products are purchased by business organizations for the commercial requirement in case of business-to-business firms. End customers are regarded as considerable part of stakeholders because they are the purchaser of final products and wholesaler or retailers buy their products for wholesaler in the market. Failure of distribution channel cannot be prevented if the customers are not the purchaser of manufactured products.
Lack of integrity and transparency
Creditors are one of the integral stakeholders as they help in funding organization purchase of assets, business organization and supply purchases. For the purchase of assets such as building, organization seeks loan from financial and banking institutions. Existing suppliers of Sunshine limited would have the expectation of consistently meeting the deadline for payments (Cristian 2014). Profitability of organization can be increased if they are able to acquire fund at proper time and will help in improving their relationships with creditors.
Maria mars is the accountant of Sunshine limited who has contributed in preparation of financial statements and has changed the profits for the period of two years.
General manger of Sunshine Limited is Kam Sunshine as per the case study that is provided in the case study. It is the responsibility of general manger to improve the overall performance of company by undertaking accurate and proper decisions.
Communities and government:
Stakeholders that are closely linked and related to Sunshine limited are communities, which it is serving, and government. Activities of organization have an impact on customers along with communities as a whole. Local areas and residents expect companies to perform in an ethical way and they should contribute towards making environmental sustainability (Pratt 2016). Moreover, it is also expected by communities that companies should perform some charitable acts and conducts some events. Decisions and steps taken by government can considerably influence operations of Sunshine limited. Therefore, it is of utmost important for business manager of organization to comply with the government regulations and maintain strong connections with local people where they are carrying out their operations and this will facilitate seamless operations.
Major shareholders of Sunshine limited are individual who are seeking to earn profits by way of higher dividend paid per share. They form a major part of business profits that is owed by organization.
Accountant of Sunshine limited that is Maria mars received request for profit minimization after ending of period dates 30th June, 2015. Objective of profit minimization was mainly to provide shareholder with consistent returns over the upcoming years so that their interest is being serves and fulfilled.
Maria eventually tailored Method of charging depreciation to the method of sum-of-years-digits from straight line method. Adoption of changes method of depreciation would have considerable impact on financial data presented in the financial statements. Maria did not disclose such changes in the financial statements and shareholders remained unacquainted with the implementation of changed method.
Accountant’s role in changing depreciation methods
AASB 116 is a complied standard relating to property, equipment and plant that are issued by Australian Accounting Standards Board. This particular standard is applicable to reporting period of reporting entities on or after 1st July, 2009. Specifying the accounting treatment relating to property, equipment and plant is the main objective of such standard so that useful financial information is discerned to shareholders or users of financial statements concerning modification of any investment methods or any type of investment made by corporations on assets. However, there are some issues related to accounting treatment for property, equipment and plant.
Some of the issues are related to carrying amount realisation or ascertainment, assets realization, realization of impairment loss in relation to assets and depreciation method modification.
In the given case study, Maria has done amendment of depreciation method of Sunshine limited to method of sum-of-years-digits compared to straight-line method with the objective of manipulating the overall reported profits in order to look attractive to investors. Deprecation concept here is associated with distribution or allocation of intangible assets over the time of useful life of assets that are being depreciated. It can be ascertained from the analysis of case study that the purpose of accounting and taxation has been the main reason of Sunshine limited being engaged in depreciation of noncurrent and fixed assets. Income of the corporation is impacted by this technique in the very first instance with latter impact on statement of financial position of company (Henderson et al., 2015). Organization expects assets utilization primarily by apportioning the associated cost in the form of depreciation expenses.
For financial reporting, Sunshine limited make realisation of expenditure related to tax. There might be divergence between the variations due to purpose of taxation and the types of assets having in similar business due to the type of depreciation method. Accounting laws vary from nation to nation and these are specified by the accounting standard adopted by companies and respective countries of operation. There are various methods for calculating depreciation such as declining or diminishing balance, straight line and sum-of-years-digits.
For the computation of depreciation of an asset, using method of sum-of-years-digits depicts an accelerated technique and the formula for computation is:
SYD (sum-of-years-digits)= Depreciable base x (Remaining useful life/ Sum-of-years-digits method)
The pattern of financial assets consumption is reflect in this method and when there do not exist any pattern, then assets are charged such that there can be utilization over the years (Warren 2016). Decision taken by Kam Shine has violated policy of organization and ultimate decision should be to make proper disclosure to shareholders.
Stakeholders of Sunshine limited
Cost of depreciation is uniform when employing straight-line depreciation method and this method is considered effective as recognition of assets economic realisation is forecasted over the useful life.
Per year depreciation= (Cost – Residual value)/ Useful life
Being a large departmental store, Sunshine limited undertakes decisions using established rule of organization (Matherly 2014). Consequently, it can be inferred from analysis that organization has violated their framed policy and financial statement has been impacted directly. However, concerning the depreciation method amendment, it is the responsibility of management to disclose all such information to shareholders. It can be concluded that Sunshine limited has not complied with AASB 116 requirements.
Conclusion:
It can be inferred from the analysis of situation of Sunshine limited that manager’s action would have considerable impact on code of conduct and ethics of organization. Suggestions made by organization and changing depreciation method would affect organization. However, due to pressure and avoiding negative feedback and fear of renewing the contract, accountants have taken the actions in relation of that. Change in depreciation method would assist in depreciation minimising over the time and this will influence profits by keeping it unchanged over the years. Nonetheless, accountant has not disclosed such actions to shareholders of organization and this has led to not confirming to AASB 116. Therefore, it is recommended to the company integrity of management should be improved that helps in reducing the risks associated with the financial statements. Accountants should adopt measures that are ethical and in the best interest of stakeholders. Measures should be taken for making shareholders and other stakeholders believe that organization is acting with integrity and complies with ethical principles.
References
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