Are indian accounting standards are capable of tackling the fradie mac situation

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AUDITING AND RESEARCH PAPER WRITING REPORT

TOPIC: Accounting standard 13


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Abstract

This research paper is an attempt to study if indian accounting standards are capable of tackling fradie mac situation which happened in united states of America . also we will compare indian standards with IFRS. I found that us gaap was easily misinterpreted and if the same situation happens in india, it will definitely gonna tackle it. I basically used accounting standard 13 for comparing.

Keyword:- IFRS,accounting,GAAP

Introduction

Accounting scandalscan bedefined as politicalorbusiness fraudswhich arise with the disclosure of financial misdeeds by trustedexecutivesof corporations or governments. These misdeeds involve complex methods for misusing or misdirecting funds, overstatingrevenues, understating expenses, overstating the value of corporate assets or underreporting the existence ofliabilities, sometimes with the cooperation of officials in other corporations or affiliates.

The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage inoff balance sheettransactions to make the company's profitability appear temporarily poorer, or simply promote and report severely conservative (e.g. pessimistic) estimates of future earnings.There are typically very few legal risks to being 'too conservative' in one's accounting and earnings estimates.

Audit and Assurance Standard 11(SA 580):

This audit standard states that management representatives can be used as audit evidence, procedures that need to be used in evaluating and documenting the management representations and what all steps can be taken if management refuses to give the information.

The auditor must take in written from the management that they take responsibility of the trueness and fairness of the financial statement prepared by them. The auditor may use management representative as audit evidence, it would not act like a substitute for the other evidences that an auditor has to find. Form all the evidence collected by the auditor, management representation letters are not only for formality. If the management refuses to give the written confirmation of their representative which the auditor feels is necessary, auditor should take it as implication that he has limited scope of the audit report

Furthermore he will write a letter to the management and get it signed by them that they are willing to take responsibility of the financial statements and also not co-operating with him to let him do his work properly.

Also it depends upon the auditor that what type of report he wants to give in such a case.

Qualified if he is satisfied with the management representations or

Disclaimer report.

Objectives

The objectives of the auditor are:

  • To obtain written representation from management and, where appropriate, those charged with governance that they believe that they are responsible for the preparation of the financial statements and for the completeness of the information provided to the auditor;
  • To support other audit evidences relevant to the financial statements by means of written representations if determined necessary by the auditor.

Accounting Fundamentals

Some Key aspects of Indian standards are:-

  1. The auditor must exercise his professional judgement in determining the matters on which he wants to obtain representations from management. However, representations should be obtained from management in writing on matters material to financial information, either individually or collectively, when other sufficient audit evidence cannot reasonably be expected to exist.
  1. During the course of an audit, management makes many representations to the auditor, When such representations relate to matters which are material to the financial information, the auditor should seek corroborative audit evidence from sources inside or outside the entity, evaluate whether the representations appears to be reasonable and consistent with other audit evidence obtained, including other representations, Consider whether the individuals making the representations are expected to be well-informed on that particular matter.
  1. Representations by management cannot be a substitute for other audit evidence that the auditor can available. If the auditor is unable to obtain enough appropriate audit evidence that he believes would are available regarding the matters which has or have a material effect on the financial information, it will be taken a limitation on the scope of his examination even if he has obtained a representation from management.
  1. In certain instances such as where knowledge of the facts is only confined to management or it is principally one of intention, a representation by management can be the only audit evidence which can reasonably be expected to be available
  1. If a representation by management is not matching with other evidence, the auditor should check the circumstances and, when necessary, may reconsider the reliability of other representations made by management.

IFRS key points

  1. The auditor should obtain written representations from management on matters material to the financial statements when other sufficient appropriate audit evidence cannot reasonably be expected to exist.
  1. During the course of an audit, management makes many representations to the Auditor. When such representations relate to matters which are material to the financial statements, the auditor will need to:

Seek corroborative audit evidence from sources inside or outside the entity

Evaluate whether the representations appear to be reasonable and consistent with other audit evidence obtained, including other representations;

Consider whether the individuals making the representations are expected to be well informed on those matters.

  1. Representations by management cannot be a substitute for other audit evidence that the auditor could reasonably expect to be available. If the auditor is unable to obtain enough appropriate audit evidence that he believes would are available regarding the matters which has or have a material effect on the financial information, it will be taken a limitation on the scope of his examination even if he has obtained a representation from management on the matter.
  1. In certain instances such as where knowledge of the facts is only confined to management or it is principally one of intention, a representation by management can be the only audit evidence which can reasonably be expected to be available.
  1. If a representation by management is not matching with other evidence, the auditor should check the circumstances and, when necessary, may reconsider the reliability of other representations made by management.

Findings of Case study (refer to Appendix 1)

  • Freddie had purchased to hedge the risk of falling interest rates increased sharply in value.
  • Freddie chose accounting treatments for these asset gains that deferred recognition of income until later years, thus “smoothing out”.
  • Freddie’s bond portfolio was held in an accounting category called “held to maturity” (HTM). This meant that the bonds would not be sold, and that therefore day- to-day fluctuations in their market value were irrelevant.
  • These bonds were carried on Freddie’s balance sheet at historical cost, which meant that increases in the bonds’ market value (as interest rates fell after 2000) were essentially ignored, and did not appear as current earnings.

In other words Freddie sought to “smooth out” reported earnings and reduce volatility by deferring to future years earnings that should have been recognized under GAAP as current income.

So we can say that the company stated its earning more than what it actually earned and the standards was not interpreted correctly.

Now what if this happens or situation arises in india, will the indian standards will be enough to tackle this situation without reforming its standards.

According to indian standards If a representation by management is not matching with other evidence, the auditor should check the circumstances and, when necessary, may reconsider the reliability of other representations made by management. Unlike US GAAP

Conclusion

Indian standards are capable of facing situations like fannie mac. Although auditors should not only go by management’s representation for audit evidence they should keep looking at last option to get the desired information. Both the IFRS and indian Auditing standards are somewhat similar only difference broadly speaking can be that IFRS is principle and indian standards are rule. It is worth noting that USA where US GAAP is used as standard is also a rule. According to this U.S should make changes in their standard or the best way to go is adopting IFRS.

Following are some recommendation for Fanni mac

In Fannie mac can take actions to fix weaknesses in accounting and management controls. These can include the expansion of senior accounting staff, creation of an operating risk oversight unit, and strengthening the review of accounting and other critical business operations. The “smoothing out” of reported earnings through questionable interpretations of GAAP is normally regarded as a violation of accounting rules. So rules should be clearly interpreted.

References

http://assets.opencrs.com/rpts/RS21567_20051115.pdf

http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-paper-111611-gaap.pdf

http://www.accounting-degree.org/scandals/

http://www.opednews.com/articles/Fannie-Mae-Accounting-Sca-by-David-Fiderer-130122-361.html

http://www.fhfa.gov/webfiles/749/specialreport122003.pdf

http://www.economist.com/node/1882980

http://paryca.org/images/AAS-ICAI%20summary.pdf

http://www.ibscdc.org/case-catalogues/Case_Studies_on_Finance_Accounting_Control_Catalogues.pdf

http://www.justice.org/pdf/uschamberbehindthebailout.pdf

http://www.sec.gov/litigation/complaints/comp19560.pdf

http://www.aig.com/Chartis/internet/US/en/Q305_10Q_updated_tcm3171-443297.pdf

http://knowledge.wharton.upenn.edu/article/accounting-for-the-abuses-at-aig/

http://research.stlouisfed.org/conferences/gse/White.pdf

http://faculty.chicagobooth.edu/erik.hurst/teaching/fannie_too_big_to_fail.pdf

http://ijbssnet.com/journals/Vol_3_No_19_October_2012/32.pdf

http://www.drlillie.com/a574/articles/acct_scandals.pdf

http://faculty.haas.berkeley.edu/jaffee/Papers/097BEPressFannie.pdf

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