This essay sample on Maxwells Accountants provides all necessary basic information on this matter, including the most common “for and against” arguments. Below are the introduction, body and conclusion parts of this essay.
Robert Maxwell was credited with saying that Accountancy is not the exact science which some of us once thought it was, and in an academic paper, Edey (1989) stated that Accounting reports can provide no more than approximate (rough is a better term) indications of the financial health and state of a business.
Profit is no more than an estimate of how well a business has performed; how good an estimate it is in specific cases is dependent upon the nature of the business being reported upon and the appropriateness of the accounting policies selected. Using relevant examples critically discuss and debate these statements.
The thoughts of Robert Maxwell and Harold Edey on the nature and significance of accounting have proven to be prophetic. The practice of showcasing and window-dressing the financial status of a business corporation is as old as the institution of accounting itself.
These practices are not always carried out with malicious intent, but more often than not, the practice of creative accounting is a harbinger for trouble in the future. During the last few years, “incidences of “creative” and even fraudulent accounting practices have been revealed with an unexpected frequency and order of magnitude. Names like “Enron”, “Lehman Brothers” and “Worldcom” no longer represent stories of growth and business success. Instead, they have become the most conspicuous symbols of all the accounting shenanigans and accompanying audit failures that have shaken the public’s confidence in financial reporting.
” In this context the insightful thoughts of accountancy experts such as Robert Maxwell and Harold Edey carries additional importance. The rest of this essay will critically evaluate their view of accountancy by referring to relevant examples.
Although the term ‘creative accounting’ has a positive ring to it, suggesting something innovative and brilliant, in reality it is little more than a euphemism for accounting practices that do not adhere to the spirit of accounting principles. These practices entail adding complexities to accounting information as well as finding novel ways of representing income, assets/liabilities, etc. Such deviations from normal accounting practices are carried out with the intent of deceiving or manipulating the readers’ understanding of the financial situation of the company. The readers are usually the stakeholders in the company, including shareholders, lenders, suppliers/vendors, taxing agencies, regulatory authorities, etc (Deegan & Unerman, 2006). In other words, how well a business corporation performs in financial terms is significant for a broad group of people that includes potential/existing investors, creditors, employees or managers. With differing information needs and purposes, each category of stakeholders should be provided with data that is comprehensive, relevant and reliable, so as to allow an informed opinion to be reached on the corporation’s financial performance (Deegan & Unerman, 2006). The following passage places the practice of ‘creative accounting’ in the context of information needs by various stakeholders:
“Preparers of financial statements are in a position to manipulate the view of economic reality presented in those statements to interested parties. There are two principal categories of manipulative behavior. The term ‘macro-manipulation’ is used to describe the lobbying of regulators to persuade them to produce regulation that is more favorable to the interests of preparers. ‘Micro-manipulation’ describes the management of accounting figures to produce a biased view at the entity level. Both categories of manipulation can be viewed as attempts at creativity by financial statement preparers. These manipulations can be regarded as morally reprehensible. They are not fair to users, they involve an unjust exercise of power, and they tend to weaken the authority of accounting regulators.” (Akhigbe, et. al., 2005)
Furthermore, all too often, the general public is left out of the list of stakeholders. A corporation’s operations have direct and indirect effect on the general public too, who don’t have a “stake” in the company in the conventional use of the term. Yet, business corporations are purely economic structures, whose sole purpose is profits and whose foresight stops with the next quarter. It is in this context that a more transparent set of accounting standards are required.
One of the major corporate scandals in recent years is that perpetrated by Bernard Madoff. Although his company was operative in the United States, its example is appropriate to the discussion of accounting practices in the UK as well. The greed of money that led Madoff to resort to unethical accounting practices is not a unique event. In fact, the basic vision of a business corporation seems to be greed and unsustainable profits. As the case of the collapse of Lehman Brothers clearly illustrates, the unrealistic ambition of CEOs of large corporations is a major factor. For example, Henry Fuld, the Lehman Brothers CEO who took his company to bankruptcy, had earned $350 million as compensation in the three years before the collapse. The deregulated economic environment is a result of right-wing economic policies of the Bush Administration during its eight year tenure. The Madoff Scandal and the collapse of Lehman Brothers then looks like a case of history repeating itself. In this context, it is incorrect to place the entire blame on top executives such as Bernard Madoff and Henry Fuld alone, for the responsibility for the crisis lies primarily with such institutions as the Securities and Exchange Commission, the Federal Reserve and other government agencies (Alexander et. al., 2009) . In the case of Federal Reserve, its policy to encourage trading in complex financial products such as derivatives had played a major role in the economic crisis. The policies framed by the Federal Reserve had indirectly contributed to income disparities in American society, which proved to be a key factor. These imbalances led to an unstable economic climate, which ultimately precipitated the market crash and recession. Considering this, it would be imprudent to hold people like Bernard Madoff and Henry Fuld guilty of creative accounting practices, for the failure is much broader and systemic in nature. (Maltby, 2009)
Moreover, financial reporting and account keeping as it exists today have their limitations. While they can accurately evaluate the values of tangible assets, more often than not the measure of intangible consequences of the company’s operations are not accounted for. For example, let us take a company that manufactures cosmetics. The manufacturing and packaging of the company’s products involves chemical processes, the residues of which are purged into a nearby river stream or sea. The discharged residual matter is highly toxic and hence harmful for the aquatic life in the waters. This leads to the diminishing in numbers of many species. Those that survive this hazard and land in fishing nets are consumed by human beings. So, now the citizenry of the area surrounding the company’s processing unit get affected. The affectation could be of varying degrees and can manifest slowly over a long period of time. These are all costs alright, but not for the business corporation. These “externalities” are not accounted for in the annual reports. And in contexts such as this Harold Edey’s and Robert Maxwell’s views on accounting take added significance. (Alexander et.al., 2009)
Some of the inherent flaws in the regulatory environment of the United States is also seen in the United Kingdom, which had its own share of corporate scandals in the lead up to the economic recession. For example,
“Since the early 1990s in the UK, there have been at least two similar occurrences. The rise and fall of Internet-related stocks in the UK and the USA spanning the turn of the century is particularly noteworthy, not only because the fall was so inevitable but also because the rise in expectations was so dependent on an optimistic presentation and interpretation of financial information. While there was huge economic growth, it was artificially fueled by excessive deregulation, the “incentivizing” of CEOs and conflicts of interest that ran out of control.” (Maltby, 2009)