CONTEMPORARY ISSUES IN ACCOUNTING

By M.B.Mamman (Student) Department of Accounting Ahmadu Bello University Zaria, Nigeria

Abstract The paper seeks to review some of the current issues in accounting. Contemporary issues in social and environmental reporting, contemporary issues in auditing and accountability, Current issues in evaluation and measurement of human capital, Reactions of capital markets and individuals to financial reporting, corporate ethics and governance, Fair value accounting , earnings management are some of issues that are making fast rounds in academic circle. The paper reviews positions of academic and professional accountants and draws conclusion that though subjects such as earnings management, corporate governance, social and environmental accounting and human resource accounting have received greater attention yet maintain their currency. We also established that the great deal of research carried out on the issues touched have not found final answers to them.

Introduction Accounting profession just like many other professions is being faced with issues that common grounds have not been found. Some of these issues have being trailing the profession for a long period of time and still maintain their currency though with wider dynamism and paradigm. Myriad of them arose from a distinctly minority group research pursuit in the past and ballooned over the decades to the present time, gathering more momentum and attention from both academic researchers, accounting professionals, regulators and politicians.

Issues such as social and environmental accounting and earnings management or financial engineering, as is otherwise being referred to, had gone not only beyond the concern of academics but graduated towards a greater preoccupation as a central concern of national and international significance. Human resource accounting, accounting for inflation, internationalisation and/or harmonisation of accounting standards, corporate governance and questions bordering on the economics of financial reporting have gathered higher currency and attention from especially academics. Recent academic work has also discovered a fallacy surrounding the issue of income and income measurement It is the belief of many critiques that the summation of effects of some of these contemporary subjects that were left unresolved for long that culminated into phenomenal collapse of world giants of the like of Enron, Parmalat, Worldcom and ushering of the 2008 global bear market. Drawing from these current issues which stand to challenge conventional wisdom especially when the dust of global financial crises begins to clear, several pertinent questions were asked. Several politicians and regulators pointed accusing fingers at accounting as contributing to the economic downturn and credit crisis. It was asked, did fair value accounting play a role in the market value prior to the bear market and subsequent to the bear market? For example did fair value cause contagion and undervaluation of banks sub-prime securities in the bear market or allow avoidance of write downs and so cause or prolong the bubble? Were there corporate governance problems in the financial sector that contributed to the financial crisis? Also asked was did management performance evaluation and compensation practices contribute to the run- up,

or the growth in the sub-prime securities and the later bear market? Were there significant deficiencies in the shareholder-management contracts that used accounting information for the performance measurement? It is clear that the entire questions border on fair value accounting, corporate governance and earnings management all of which are contemporary issues to accounting. It is the objective of this paper to review the pros and cons of arguments on the issue of earnings management, human resource accounting, social and environmental accounting, corporate governance and economics of financial reporting. Therefore the methodology adopted is wholly literature review and conclusions were drawn from content analysis.

Scope of the Paper Current issues in accounting are many and indeed too tasking to mention all. Because of limited capacity, resources and time the paper delves only on the subjects of earnings management, Human resource accounting, corporate governance social and environmental accounting. It is in the view of the presenters that other areas that were not touched can be handled by other reviewers. CONCEPTUAL ANALYSIS Earnings management: Earnings management is a deliberate choice of accounting policies by manager in order to achieve specific objectives. Earnings management is management

action taken to get reported earnings to a desired level. Earnings management has three mutually exclusive forms: Earnings management, Earnings fraud and creative accounting. When earnings manipulation is done through exercising the discretion allowed by accounting standards, corporate laws and/or structuring activities in such a way that expected firm value is not affected negatively, it is earnings management, otherwise it is earnings fraud. Creative accounting is the manipulation that does not contravene accounting standards or laws. Ning (2006). For example, GAAP accords firms the discretion to choose the amortisation policy that best reflects the earning potential of an asset. This flexibility allows managers to correctly reflect the earning potential of the asset. While the result of the earning management may not represent the actual cash flow for the period, it should reflect the periods revenues and expenses. There are two types of earnings management: adjusting individual accounting policies and using different accrual methods. Manager can adjust any number of accounting policies to affect the value of a firm. Common accounting policy changes include adjusting amortisation expenses or revenue recognition methods. Also, manger can set up different accruals to spread revenue and expenses recognition. Anonymous contributor (2002). There are several motivations to earnings management: contractual, political and taxation motivations, changes of chief executive officer, initial public offerings and in communicating information to investors. Earning management may be used to take advantage of covenants or avoid the violation of covenants in contracts. Managements bonuses may be structured so that they are reflective of the reported net income for the current year. This means that management can use earnings management to raise net income for the

current year. There is a close nexus between the practice of earnings management and corporate governance. Using two groups of US firms, one with relatively high and one with relatively low levels of discretionary accruals in the year 1996, it was found that earnings management is significantly linked with some of the governance practices by audit committee and board of directors. Sonda (2001). This type of close relationship between earnings management (or earnings fraud) and governance practices has been established in the Nigerian financial services industry in 2009, following the examination of records of the 24 banks conducted jointly by the Central Bank of Nigeria and the Nigerian Deposit Insurance Corporation. Evidences have been found that almost all the 24 banks engaged in one form of earnings management or the other through the vehicle of risk assets (loans and advances). The chief Executive Officers of the banks that were affected smoothed their income by not making adequate provisions on their non-performing assets. By so doing investors in the capital market were made to believe that all is well with these banks. Year in year out, they declared supernormal profit and showed outrageous growth in their total assets. Thus their share prices in the stock market kept soaring up to time the bubble busted. Earnings management is well known for four accuses, Ning (2006): 1. That earnings management is a fraud. 2. Earnings management leads to representational unfaithfulness of financial statement 3. Earnings management implies deviousness or unethical action to fool or mislead users of earnings information.

4. Earnings management has wealth redistributive effects among related parties. For instance, managers are better off at the expense of shareholders. Despite criticisms heaped on the practice of earnings management, there are some academic works which still look at earnings management as an acceptable practice, Ning (2006). Everything has two sides; however previous studies on earnings management seemed lopsided probably because of failure or refusal to see the dividing line between earnings management on one hand and earnings fraud on the other. We also uphold the view that instead of despising at earnings management, efforts should be made to improve antifraud programs. Useful mechanisms for the purpose include internal controls, audits checks, regulatory bodies monitoring and financial analysts scrutiny. Given that earnings management practice finds supports in GAAP, there is the need for accounting policymakers and standard-setters to examine how the current standards allow abusive manipulation of accounting numbers and strive to reduce the subjectivity and ambiguity in accounting standards and to enable the standards to cope with business innovations. The less subjectivity and ambiguity accounting standards have the less chance of earnings frauds. The ambiguity in the current accounting standards lead to substantial disagreement as to what is within and what is outside the bounds of acceptable reporting. More so, standard-setters need to keep pace with accelerating changes in business practices so as to prevent accounting recognition from lagging economic events and minimise the opportunities for creative accounting practices. Ning (2006). The models put forward by Penman, Leuz et al, Simko and Pinches, and Jones are a welcome development. The only issue with them

is that they still remain within the academic circle, waiting for wider recognition and acceptability.

Social and Environmental Accounting From a minority voice in the 1970s, social and environmental issue is receiving increasing attention from academic and professional accountants and government within the last two decades.(Parker 2005) . Parker (2005) argued that accounting and management researchers engaged in social and environmental accounting following the earlier recognition of their importance by communities, lobby groups, government and sectors of business community. There is a growing interest in the development of social and environmental accounting globally. Social accounting also known as social and environmental accounting, corporate social reporting, corporate social responsibility reporting, or sustainability accounting is the process of communicating the social and environmental effects of organisations economic actions to a particular interest group within the society and the society at large. (Wikipedia). Social accounting for accountability purposes is designed to support and facilitate the pursuit of societys objectives. These objectives can be manifold but can typically be described in terms of social and environmental desirability and sustainability. In order to make informed choices on these objectives, the flow of information in the society in general and in accounting in particular needs to cater for democratic decision making. In democratic system, Gray (2006), argues that there must be flow of information in which those controlling the resources provide accounts to society of their use of those resources (i.e a system of corporate accountability).

Society seems to profit from implementing a social and environmental approach to accounting in many ways: 1. Honouring stakeholders rights of information; 2. Balancing corporate power with corporate responsibility; 3. Increasing transparency of corporate activity 4. Identifying social and environmental costs of economic success.

The pressures to consider the social and environmental impact of business operations have been growing steadily over the past four decades. Engaging in social responsibility activities and disclosure has emerged as an important dimension of corporate voluntary practice. The notion of corporate social responsibility is nowadays related to issues such as environmental protection, health and safety at work, relations with local communities and relations with consumers. It is a concept whereby companies decide voluntarily to contribute to a better society and cleaner environment -sustainability accounting (European Commission 2001 in Manuel C.B. and C. Delgado, 2009).

The acknowledgement of corporate social responsibility implies the need to recognise the importance of disclosure of information on companies activities related to such responsibility. Gray (2000) in Manuel C.B. and C. Delgado, (2009) gave a broad based implication of social and environmental accounting to mean the preparation and publication of an account about an organisations social , environmental, employees, community, customer and other stakeholder interactions and activities and where, possible, the consequences of those interactions and activities. The coterie of researchers on the area of social and environmental accounting worldwide is relatively small (Parker 2005) but the concern on the subject is growing at geometric progression. Because of opaque academic and professional accountants stance on the issue, exploration companies around the

world are on the rampage offsetting the natural ecosystem without accounting for their actions.

In Nigeria the crisis in the Niger Delta has its root in the activities of oil companies. The Niger Delta oil war (courtesy of Cable News Network [CNN]) metamorphosed at first from mere communal agitations for job placements, social amenities and compensations for damaged economic resource sustenance factors to a regional conflict. This worrisome degeneration resulted from a build-up of insensitive attitudes of successive governments as well as from uncaring mentality of the private operators of the concerned firms on the plight of those whose resources and land were target of economic exploiters in the name of oil explorers. The plain truth remains that the Niger Delta conflict which in all ramifications qualifies to be called a war started as a result of careless and humanly degrading approach to oil exploration with lots of damaging effects on the ecosystem of the region since the first oil well commenced operation at Oloibiri in 1956. The damages done to both farmlands and fresh water, streams and rivers by avoidable spillages and gas flaring are unquantifiable and this, of course, has contributed or led to the ubiquitous environmental degradation. This phenomenon which manifests in the form of ozone layer depletion, pollution of farm lands, rivers and lakes, acid rains, deforestation, erosion and uncontrolled industrial emission of carbon dioxide (CO2) pose greater biodiversity problems. The work of Enyi Patrick Enyi of the Covenant University (though unpublished) dealt with the issue of SEA in connection with the crisis in the Niger Delta Region of Southern Nigeria.

In essence the issue of social and environmental accounting is a great one and seriously begging for attention of especially academic accountants and researchers to find ways and means of capturing social and environmental activities of firms in their books of accounts. Only when managers are convinced that production costs have environmental components and that by identifying and controlling environmental cost and money can be saved before managers will improve on environmental performance, Cleopatra and Aureliana (2005?).

Human Resource Accounting (HRA) HRA is the human resources identification and measuring process and also its communication to the interested parties.- American Accounting Association. Human resource accounting is an attempt to identify, quantify and report investment made in human resources of an organisation that are not presently accounted for under conventional accounting practice. Businesses which require considerable deal of skills or are science-based, show a significant difference between market value and book value. The difference is for intangible assets (including human skills). Apparently human resources (or skills) are yet to get recognition on the balance sheet. Businesses are not accounting for it in Books of Accounts. Yet auditors do certify in their reports that balance sheet shows true position of business in spite of the fact that one important asset of the has been not captured(the value of human resources. Kodwani and Twari (2007).

Even though human resource has not been captured on the balance sheet, there is near agreement that it is an intangible asset. This is because the generally accepted definition of intangibles proposes that the most common category of intangible assets are technology-related (e.g., engineering drawings), customer-related (e.g., customer lists), contractrelated (e.g., favourable supplier contracts), data-processing-related (e.g., computer software), goodwill (e.g., going concern), human-related (e.g., a trained and assembled workforce), etc. However definition given by IAS 38 (1998) introduced a new dimension into the issue of weather human resources qualifies for intangible assets. IAS 38, 1998 defines intangible assets thus: An intangible asset is an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. An asset is a resource: (a) controlled by an enterprise as a result of past events, and, (b) from which future economic benefits are expected to flow to the enterprise. The control aspect in this definition is very critical. when a firm has insufficient control over the expected future economic benefits arising from a team of skilled staff and from training, there might be serious problems in finding human resource (human capital) to meet the definition of intangible asset. Yet, organisational value comprised of three classes of assets that are integral to an organisations ability to produce goods and services: Financial assets-include assets such as cash and marketable securities and also referred to as financial capital, Physical Assets- include such tangible assets as property, plants and equipments, and other furnishings

 Intangible Assets-Also called intangible capital, include intellectual capital (patent formulas, product designs, etc), human capital and others.

Both Financial Accounting Standard Board and the Generally Accepted Accounting Principles seem reluctant to effect a change to a system that will see to the appearance of human assets on the balance sheet. This is in spite of the fact that it is not unusual for value of firm to exceed its book (tangible) assets by two or three fold. For example, in 1996, Microsofts ratio of intangible assets to its book (tangible) assets exceeded 11:1. Fitz-ens, J (2000). The reality of the situation is that 60 to 70 percent of firms expenditures on average are labour-related. Weatherly (2002). It would seem nothing less than a business imperative that the challenge of valuation of human capital be pursued. Various researchers have proposed different models that can used to evaluate human resources. Some of these modes are historical costs, replacement costs, Compensation model, Belkoui (2007). Other models such as Behavioural, Historical cost , replacement costs, Standard cost method Lev and Schwartz method,Tiwari (2005). The effort by Ravindra Tiwari (2005) in valuing human capital in terms of real capital cost, Net present value of future salary/ wages payment and performance evaluation is a step that needs to be pursued by all the stakeholders to the final frontier. Issues on corporate Governance Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the

relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, the board of directors, employees, customers, creditors, suppliers, and the community at large. Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world (Wikipedia) There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In 2002, the U.S. federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance by way of guaranteeing auditors independence. The near collapse of eight commercial banks in 2009, in Nigeria was a clear case of corporate governance.

The major challenge of corporate governance borders on the issues of directors and audit committee. As far as the issue of independence is concerned, Sarbanes-Oxley report (2002) has done a good job in addressing wide range of matters surrounding Audit independence and on what services auditors can provide and what they cannot provide to an organisation which

they serve as auditors. However one challenge for directors and executive management is to find outside directors who are sufficiently independent but still knowledgeable about and engaged in the business of the company on whose board they will sit. Independence reflects qualities of objectivity, experience, insight, and force of character. The need for directors to possess this blend of knowledge plus independence is critical, given the increased technical complexity of most business activities and the rapid pace of change in financial markets and practices. Finding such outside directors can involve a tough balancing act. Directors who are paid too little or who are kept at the perimeter of the corporate structure may be truly independent but have little incentive or insufficient knowledge about the organization to govern effectively. By contrast, directors who are paid well or who are fully integrated into the corporate structure may have the incentive and the knowledge to govern effectively but lack the desired independence to discipline incompetent or dishonest management. The risk is that as outside directors compensation increases, their independence may wane and, instead of functioning as watchdogs for shareholders, they may increasingly function as lapdogs for management. Getting the right balance of expertise and independence so that the board does not rubber-stamp the decisions of top management is a major challenge. Another challenge in selecting outside directors is how to balance general business knowledge with specific industry knowledge and technical expertise in areas such as accounting, finance, and labour markets.

Developing a well-rounded, appropriately balanced board of directors is a tough assignment. It is especially so considering that the shareholders who elect the board are generally a diffuse group with little economic incentive or

capability to monitor the corporation closelyuntil, of course, something goes terribly wrong. Added to these challenges is the difficulty of finding qualified directors who have the time to devote to the affairs of the company. Some qualified directors may be reluctant to serve for fear that the potential bad performance of the firm will damage their reputations .The irony is that directors who are most qualified may be the least willing to serve because of the opportunity costs of the time they must spend and the potential threat to their reputations. Given what has transpired over this past year, there may in fact be a need to be reconceived the role of directors. Some firms reportedly are already moving away from the tradition of choosing the CEO of another company as a director to choosing people who are equipped with more specialized and technical knowledge. William (2002). Board size, Board independence, financial motivation of independent directors and competence of the board of directors are important aspect of corporate governance. Sonda Marrakchi et al (2001).

Conclusions: From the foregoing literature review it is clear that the issue of social and environmental accounting is still begging for more attention from the academics. The issue is imperative for all inhabitants of earth, our planet because it has to do with sustainability and therefore unless corporations are made to see that all aspects of their business operations have environmental costs which can be saved if proper attention is paid to the environment and to the host community. Similarly, earnings management and corporate

governance are like twin brothers. Earnings management will continue to be a subject of debate so long Generally Accepted Accounting Principles allow mangers to choose the accounting policies that best reflect asset potentials and choose methods of accruals. As for the corporate governance, once an organisation settles on the issue of membership of audit committee and finds the right calibre of people to be its board of directors, corporate ethics will be enshrined. However, on human capital to find itself on the balance sheet, academics have to arrive as to the definition of intangible asset so make human asset fits into the definition and to also find the right model of calculating human capital.

References: Williams J.M.(2002) Issues in Corporate Governance Current Issues-Federal Reserve Bank of New York, Vol.8, No.8

Enyi P.E. (Unpublshied) Enrvironmental and asocial Accounting as aAn Alternative Approach to Confliect Resolution i a Volatile and E-Business Environment.

Manuel C.B and C. Delgado (2009)Research on Social and Environmental Accounting in Southern European Counties Vol.38 No.144

Ulf J. Et al (1998) I Human Resource Costing and Accounting Versus Balanced Scorecard: A Literature Survey of Experience with the Concepts School of Business Stockholm University. Ravindra T. (1995) Human resource Accounting : A New dimension. Irvin Publication 6Th Ed.

Cleopatra S. And A.G. Roman (2005) The Environmental Accounting; An Instrument for Promoting the Environmental Management.

Bob. R (2006) Social, Environmental and Sustainability Reporting and Organisation Value Creation. Accounting, Auditing and Accountability Journal Vol.19 No.6.

Parker L.D. (2005) Social and Environmental Accountability Research. Accounting, Auditing and Accountability Journal Vol.18 No.6. Wikipedia Sonda M.C. et al (2001) Corporate Governance And Earnings management . Http//Papaer. SSRN. .com/Abstract.275053