Accounting and business functions

ACCA - F1   ACCOUNTANT  IN  BUSINESS

Accounting starts from timely recording of recurring transactions by the bottom level staffs and systems. Input data are collected from primary sources. They are fed into the accounting system (manual/computer based) for processing. Periodically, by middle management and top level executives, these data are (extracted and) manipulated to squeeze out information. Financial statements are one of those pieces of information, which is publicly available for review and remarks.  It is the responsibility of directors to prepare financial statements. It is one of the various functions within business.

Double entry bookkeeping system is widely practiced within businesses. In 1494 from Italy, it was Luca Pacioli, who codified double entry bookkeeping system. Double-entry bookkeeping is a system of bookkeeping which requires a corresponding and opposite entry of different account to a single transaction. Mere recording is not the end of accounting function. It is only the entry point to handle raw data. Estimation, analyzing, evaluating, and reporting are other parts of accounting function. Today accounting profession has grown to a multimillion-dollar industry. It is because accounting facilitates decision making related to all other functions.

The use of management and financial account facilitates business development by segregating fixed and variable cost, analyzing borrowing capacity and finding breakeven point. It also helps define sales price and allowable discount. Management accounting helps optimize production efficiency whereas financial accounting financial accounting helps evaluate overall performance of organisation/division with its benchmark. Analysis of performance of employees with budget and previous performance help define incentive and rewards. Forecast and projection of cash flow assists on formulating long-term financial strategies. Publicly available financial information is used to compare market share and price relations and understand the position of firm in market and industry.

Stakeholders demand accountability. Shareholders being owner of the company and directors' being agent, shareholders expect directors to practice fiduciary duty and report companies performance in AGM through financial statements. Banks and lenders/creditors rely on these information to retain confidence on recoverability of their investment. Buyers use this information to maintain their loyalty to the product. Government uses this information to analyse growth in tax and national income. Thus, stakeholders customize available financial statement and use to address their needs.

Accounting regulation

ACCA - F1   ACCOUNTANT  IN  BUSINESS

World's dispersed resources which were once out of reach by many small and middle size enterprises are now easily accessible. One organization may acquire technical resource form country A, finance from country B, sale its product worldwide and operate from country C. Outsourcing is also common. Therefore, traditional accounting style guided fully by ethics, cultural standards and national Generally Accepted Accounting Practice (GAAP) faced number of challenges regarding comparability and  understandability within globalized business world. It increased risk, uncertainty, distress and outrage among users of financial information. So, to tackle fraud, conflicts and emerging issues, together accounting communities from around the world take initiation to harmonize and standardize accounting profession.

Despite there are still many regional/nationals standards, rules and regulations companies should comply to keep operating within one country. They should first be accountable to national/regional authorities, which impose national regulatory rules to bring uniformity in accounting policy and practice. E.g. In UK companies are regulated by Companies House and in Hong Kong by Companies Registry. Similarly, financial statements in UK are governed by 'Companies Act 2006' and in Hong Kong by 'Companies Ordinance.'

Page 4 Public Sector Accounting

In Nepal Laws governing state-owned enterprises have made provision for maintenance of accounts on the basis of a double-entry book-keeping system, following generally accepted accounting principles in case of stated-owned enterprises, expect companies and banks. The double-entry system does follow Nepal Accounting Standards in Case of companies, but there is no provision for mandatory compliance of International Standards (IAS/IFRS), except for banks.

A synopsis from an article 'Nepal on the Path of implementation of IFRS' published in ICAN Journal September 2013.

 "IFRS accepted as a global language for accounting and financial reporting, it is in the interest of country itself to adopt it and be understood by rest of the world instead of being isolated in financial reporting. At the reporting entity level, by adopting IFRS, a business entity can present its financial statements on the same basis as its foreign competitors, with enhanced Comparability. Entities may also need to convert to IFRSs if they are a subsidiary of a foreign entity that uses IFRSs."

Corporate Governance

ACCA - F1   ACCOUNTANT  IN  BUSINESS

Corporate governance is the way companies are directed and controlled. Good governance ties together interest of every identifiable stakeholder. Governance emphasis on accountability, responsibilities, disclosure and transparency. OECD (Organisation for Economic Co-operation and Development) highlights fundamental principles of corporate governance, which have been adopted as one of the twelve key standards for sound financial system by the Financial Stability forum.

The Organisation for Economic Co-operation and Development published its ‘Principles of Corporate Governance’ in 2004. These are:

• Rights of shareholders: The corporate governance framework should protect shareholders and facilitate their rights in the company. Companies should generate investment returns for the risk capital put up by the shareholders.
• Equitable treatment of shareholders: All shareholders should be treated equitably (fairly), including those who constitute a minority, individuals and foreign shareholders. Shareholders should have redress when their rights are contravened or where an individual shareholder or group of shareholders is oppressed by the majority.
• Stakeholders: The corporate governance framework should recognise the legal rights of stakeholders and facilitate cooperation with them in order to create wealth, employment and sustainable enterprises.
• Disclosure and transparency: Companies should make relevant, timely disclosures on matters affecting financial performance, management and ownership of the business.
• Board of directors: The board of directors should set the direction of the company and monitor management in order that the company will achieve its objectives. The corporate governance framework should underpin the board’s accountability to the company and its members.

Corporate governance framework depends on legal, regulatory, and institutional environment. Corporate governance, ethical practice, corporate awareness and societal interest have impact on reputation and long-term success of organisation. Most countries adopt principle-based approach to corporate governance. Principle-based approach focuses on adherence to best practice and if not complied company needs to explain the cause for non-compliance. Some countries adopt statutory rules-based approach. Every companies within such regime should mandatorily fulfill corporate governance requirements.

ACCA Article: Corporate Governance: The board of directorsand standing Committees

Ethics

ACCA - F1   ACCOUNTANT  IN  BUSINESS

Ethics is about doing things right. In general, ethics is a moral philosophy where a person makes a specific moral choice and sticks to it. An act in certain circumstance, which is right from one prospect may not be right from other prospect. Eg; capital punishment is seen as ethical practice in certain culture while other disagree. Rules, principles and practices defined within constitutional books are laws, acts or regulations. Law is enforceable under every circumstance and defines rights and responsibilities.

An action is series of (consequent/simultaneous) events guided by rules or principles dragged by present/future seen/unseen consequences(goal). In other way, ethics guide action to result outcome. Ethics is valued at all level in business organisation. Business ethics is the application of ethical values to business behaviour.

Different types of ethics views:

Ø  Rulebased ethics: Look at the rules and follow the rules (duty, human rights, justice)

o   Deontological ethics: based on duty, focus on adherence to rules and present obligation. E.g. Kantianism: focus on duty and the motives of person which perform duty.

o   Justice: consequences of justice override considerations about consequences and utility. E.g. Jhon Rawls: 1^st focus on equal right + 2^nd  management of social and economic inequalities to benefit least advantage group

o   Human Rights: E.g. Child rights, Equal rights for women, Employment rights, Rights for people with disabilities

Ø  Normative ethics: focus on principle

o   Teleological /Consequentialist ethics: focus on end/final cause/goal driven by inherited nature of the circumstances

§  Ethical egoism - focus on self interest

§  Utilitarianism - focus on benefit of majority

Ethics surrounds every profession and accounting is not an exemption. Accounting profession is complex with financial and regulatory issues. It requires prudential judgement and critical assessment. Accountants need to act skeptical to form any conclusion and identify issues related to creative accounting, bribes and insider trading. This increases the importance of ethics in accounting profession. The Code of Ethics and Conduct for ACCA students and members is set out in section 3 of the ACCA Rulebook.

IFAC Code of Ethics & ACCA Code of Ethics include (1)Integrity (Honesty), (2)Objectivity (Unbiased), (3)Confidentiality, (4)Professional behaviour and (5)Professional competency and due care.

ACCA Article: A QUESTION OF ETHICS

Committee

ACCA - F1   ACCOUNTANT  IN  BUSINESS

 A committee is a small group of people, chosen by large group, to make decision in particular subject. Committee can be ad-hoc (temporary i.e. formed to address one-off/informal subject) or formal/standing (permanent as part of organisation that meets regularly e.g. Board of Directors). Board of Directors directs and controls organisation and is also known as steering committee. A steering committee is a group of high-level advisors who have been appointed to provide an organization or project with direction.

Committees within organisation:

Committees of directors: assist board in decision-making and policy process. E.g. audit/risk, nomination/remuneration, finance and policy governance.

Advisory committees: advisory committees advice on legal matters, general practices and international strategies.

Compliance committees: Compliance committees evaluates evaluate adherence to policies and review output. E.g. Quality compliance committee, Work/safety compliance committee and Ethical committee.

Divisional committees/Sub-committee: are established by divisions to enhance staff engagement. The committees represent the interests of staff within a particular group and act in an advisory capacity to the board, under agreed terms of reference or a charter.

Purpose of committee in an organisation:

Ø  Decision making

Ø  Relaying decisions and infrastructure

Ø  Brainstorming: free exchange to generate new ideas

Ø  Participative: problem solving

Ø  Providing advice and information

Consultation

Meeting process (Role of chairman and sectary of a committee)

Holding of meeting: which place, what time, (how many times a year?) frequency, type (face-to-face, telephone, video conference)

Quorum: small number of people who must be at the meeting before it can begin

Attendance and meeting procedures: who attend (committee members, their delegates and external parties invited), the chairs steers the committee (put forward the agenda to discuss, add emergency items, maintains order and keep to schedule)

Discussion and decision: Committee papers(Committee Secretary shall distribute agenda and related papers in advance of a meeting), Speaking, voting rights and contribution to the agenda

 Finalizing activities: Committee minutes (Committee Secretary shall prepare minutes of meeting and have them approved by the Committee Chair)

Committees represent shared responsibilities and ability to handle large volume of work between professional/specialized members from different fields. However, in certain situation the process can be lengthy, costly and dominating.

Checkout Audit and Risk committee for CPA Australia

ACCA Article: Corporate governance: The board of directors and standing committees