Week 1 - Financial reporting & the regulatory framework

Question 1

Purpose of FA and financial reporting

Answer 1

Produce high quality information to help make informed decisions
- also, forecasting predictions, performance measurement
- managers to evaluate market competitions

Question 2

Why does FR need to be prepared according to a regulatory framework?

Answer 2

• ‘True and fair’ view/truthful representation of entity’s economic performance, although not 100% accuracy due to judgments
• Comparability and prevent fraudulent reporting
• Info have major economic consequences to the biz, various stakeholders & the society

Question 3

Companies Act 2006

Answer 3

1. Members of a company = Subscribers on a company’s memorandum & those on its members’ register (sec.112)
2. Private co. >= 1 DIRECTOR
   Public co. >= 2
   All co.s >= 1 director who is a natural person (sec.154/155)
3. The directors must prepare and submit to Company House, not the accountants b/c directors own(?) the company (sec.394/399)
4. (sec.393) Directors must not approve accounts unless satisfied that give a ‘true and fair’ view of A+L, fin. position and P/L.
5. Full set of fin. stt.s + notes of disclosure attached to the stt.s need to be included in the accounts

Question 4

5 key issues of Carillion plc (revealed in 2018)
- Britain’s 2nd largest construction company
- growing net debt & pension deficit
*Questionable that gov was still awarding Carillion with projects when months had passed and they could have found out the profit warnings

Answer 4

1. Lack of accountability
   - manipulated accounts & lack of reliable info for shareholders to influence board decision-making
2. Culture of non-compliance
   - empty threats by TPR to enforce pension contributions (The Pensions Regulator)
3. Presentation and availability of robust financial info extremely weak
4. Ineffective internal control, audit & corporate governance
   - ineffective board of directors and making decisions w/o questioning
5. Weak external regulatory enforcement, led to a reform of FRC which will be replaced by new regulator ARGA

Question 5

To what extent do you believe that the existing regulations & standards are capable of dealing with accounting errors, manipulations and fraud? Discuss.

Answer 5

See Notion/W1 slide + preventing tax evasion issues

Question 6

Wirecard AG accounting scandal (2008 - revealed in 2019 by the FT)

Answer 6

• accounting manipulations dated since 2008
• growth of intangible assets “customer relationship”/goodwill was treated as tangible assets -> inflated company’s assets
• 1.9bn euros of cash balances were missing
• EY was Wirecard’s auditor since 2008 and provided unqualified opinions ever since, except in 2019
• Ex-head of accounting admitted to forging documents that were requested by KPMG during a special audit in 2019

Question 7

Luckin Coffee plc accounting scandal - Main points (revealed in April 2020)

Answer 7

• sales were overstated & transactions were fabricated
• 2.2bn yuan (£250m/$310m) of fabricated sales transactions, amounted to 40% of its estimated sales
• EY was Luckin’s auditor since it was founded in 2017. EY managed to find accounting issues in Luckin

Question 8

Tesco plc accounting scandal - Main points

(revealed in September 2014, Britain’s biggest retailer)

Answer 8

• overstated profits by £263m by “accelerated recognition of commercial income and delayed accrual of costs” (The Guardian, 22 September 2014)
• 2016 charge by the Serious Fraud office (SFO) against 3 former senior Tesco executives over a fraud and false accounting case was dropped in 2019 (“couldn’t find fraud”)

Question 9

2 pros & 4 limitations of non-financial reporting

Answer 9

Pros
1. Non-financial measures are important for holistic decision-making. Provides contextual information, which could have financial and social implications.
2. Sustainability/ESG disclosure reports (incl. TCFD requirements in the UK) can foster more ESG-related practices & increase company’s transparency and accountability w/ stakeholders.

Limitations
1. Might lead to greenwashing
2. Many voluntary sustainability frameworks exist, eg. GRI, SASB. Reduces comparability & difficult for investors to make decisions (“information overload”)
- lack of standardisation
- also quality > quantity
3. Time and cost of preparation
4. These sustainability standards would possibly have the same issues as financial ones {eg. leave room for interpretation, exploitation of flexibility, manipulation}

Question 10

Discuss whether the new mandatory climate-related financial disclosure requirements (effective from 6 April 2022) to be complied by UK companies that are required to produce a non-financial statement improve corporate accountability and responsibility.

{TCFD from CPE 2}

Answer 10

For
1. Providing additional INFORMATION for investors to compare between companies and aid in their decision-making
2. Users of companies’ accounts are looking for evidence on HOLISTIC business models beyond reports focused solely on a company’s financial health
3. Drives companies to be RESPONSIBLE and TRANSPARENT about its climate-related decisions with its stakeholders; ACCOUNTABILITY

Against
4. Leaves room for interpretation, similar to financial reporting
- may result in lack of truthful representation
- RENDER the climate-related disclosures INEFFECTIVE in improving…
5. The disclosure will still be reviewed by the company’s AUDITOR and the Financial Reporting Council (FRC)
- past acct. scandals, such as that of Carillion plc involving the FRC and KPMG, have shown that even professional bodies can fail at acting against non-compliance.

Conclusion: we CANNOT ASCERTAIN that the new mandate will enhance corporate accountability and responsibility but it is LIKELY to push companies towards more sustainable initiatives.