Accounting

Commentary on Financial Ratios

Profitability Ratios

1.
Operating profit margin on ordinary activities Aer lingus -1.33, Ryan Air 20.16
Aer lingus shows a negative margin of 1.33 for the year 2008 this is largely attributable to the rising fuel costs Aer lingus had to face. This year fuel costs rose almost by 58.4.Another reason to the depleting operating profit margins is the decrease in passenger fares, although the number of passengers that traveled with Aer lingus this year has increased but because of the fall in passenger fares the revenue only increased by 5.6.

On the other hand, Ryan air has a better operating profit margin that is mainly because of the difference in sizes of the two companies. Ryan air is Europes largest low fares airline and therefore is a highly attractive to passengers looking for low fares. Ryan air also showed an impressive increase of 20 in the number of passengers that traveled with them as compared to last year. That also increased their revenue by 21 because they did not have to decrease their prices further as their fares are already cheap (Aer lingus plc, 2008).

2.
Operating profit margin including extra ordinary activities  Aer lingus -11.64, Ryan Air 16.84. The operating profit margin including extra ordinary activities has decreased to negative margin of -11.64.This largely due to the cost of exceptional items, these are one-off costs that includes  117.5mln in relation to staff cost restructuring in this year, a 5.9mln relating to a defense of a take over bid by RyanAir plc and some 17.5mln paid under the program for continuous improvement. Whereas, RyaniAir plc again shows a profit margin of 16.84, because they did not incur any major exceptional cost in the year 2008 .Ryan earned a tax gain of  10.6m from the disposal of five aircraft.

3. Net profit margin Aer lingus -7.96, RyanAir 14.38
The net profit margin of Aer lingus has decreased from the previous year, last year they shows a 105.3 m profit after tax but in 2008 they incurred a loss of 107.8m. This is mainly because of the rising fuel costs and heavy cost suffered under net exceptional items. RyanAir has an impressive net profit margin of 14.38, bit has decreased from the last years margin of 19.47.This could be because of the foreign exchange loss suffered of over  56m.

4. Return on Assets Aer lingus -5.45, RyanAir 6.45
This ratio shows Assets utilization with respect to the profit earned for the year. Aer lingus has a negative return its assets because of the loss incurred this year and it also invested big amounts in buying aircraft fleet and also expanding its operations outside Ireland. RyanAir showed an impressive return on its Assets despite investing heavily in buying Boeing aircraft

5. Return on Equity Aer lingus -12.58, RyanAir 15.47
The reason for a negative return margin on equity is that the company incurred loss for the year and it also issued ordinary shares for the year, including bonus shares. RyanAir has a better return on equity than Aer lingus in 2008, because they made a profit this year whereas Aer lingus incurred a loss. RyanAir did not issue any new shares this year in fact they exercised a share buyback of 59.5m ordinary shares.

6. Return on capital employed  Aer lingus 3.41, RyanAir 13.12
Aer lingus shows a positive margin on return on capital employed, because they made a profit of 105m in Earnings before interest and tax, despite the fact they further borrowed in a finance lease this year in long term liabilities. RyanAir showed a return of 13.13 on capital employed mainly because they did not borrow much in long term liabilities and also did not issue any shares this year (Ryan Air Plc, 2008).

Liquidity Ratios

1. Current ratio Aer lingus 1.36 times, RyanAir 4.064 times
Normally a current ratio of 2 times is considered a good one, but 1.36 times is not too bad considering the financial conditions Aer lingus is in. This Aer lingus current liabilities increased tremendously compared to the previous year, whereas the current assets only showed a slight increase. Ryan has an impressive current ratio of 2.06 times which means they have adequate level of current assets to meet their current liabilities.
However, this could also be a negative sign for the company because it may mean the company either has too much capital tied up in cash or it is unable to recover from receivables early enough.

2. Quick ratio Aer lingus 0.12 times, RyanAir 0.97 times
The quick ratio also known as acid test ratio reveals the more realistic picture than the current of companys ability to pay off its current liabilities. The low quick ratio suggests that entity is not able to generate enough cash resources, either because of declining sales or not able to collect receivables quickly enough.

It eliminates the illiquid types of assets like inventory from current assets because inventory is not considered to be as rapidly convertible into cash. Generally the quick ratio should be 11 or higher however this varies widely by industry. Aer lingus has a very low quick ratio of 0.121 it suggests that the company does not have enough liquid assets to cover its current liabilities. The probable reasons include the increase in current portion of finance lease obligation by   63.4million in the year ended 2008.The current liability portion of derivative financial instrument increased from  6.2million to  11.4million in 2008. Another possible reason seems to be that Aer lingus reclassified its financial assets as loans and receivables that were previously recognized as available for sale. As a result its liquid assets were reduced by  9.6million during the year, so the quick ratio was also decreased by the reduction in cash equivalents.

Ryan Air s ratio (0.97) is close to an ideal acid test ratio of 11 it suggests that the company is quickly converting receivables into cash and has faster inventory turnover and cash conversion cycles than Aer lingus. Though Ryan Air still needs to improve its quick ratio to an ideal ratio of 11 or higher to ensure that the company is able to cover its financial obligations.

3. Cash ratio Aer lingus 0.008 times, RyanAir 0.94 times
This ratio determines entitys ability to meet its current liabilities from its cash resources. Aer ingus has a very low cash ratio, indicating that it has a fewer cash resources to meet its current liabilities. T has not been able to receive cash from trade receivables to increase the companys cash reserves. RyanAir has a satisfactory ratio of 0.94 times, indicating that the company can meet its current liabilities from its cash resources.

Gearing Ratios

1. DebtEquity Aer lingus 1.70 times, RyanAir 1.53times
Aer lingus has a better debtequity ratio indicating that the company is less geared and raising finance through further issue of equity rather than borrowing from the lenders. RyanAir has a lower ratio than Aerlingus, mainly because it did not issue any further ordinary shares this year and raised finance through borrowing long term debt (Ryan Air Plc, 2008).

2. Total debt to total assets Aer lingus 62.91, RyanAir 60.46
Ideally this ratio should be around 50, but Aer lingus doesnt have too bad a ratio of total debt to total assets, indicating that the company can safely meet its liabilities from its resources. Ryan Air almost has a slightly better ratio than Aer lingus.

3. DebtCapital Employed Aer lingus 40.17, RyanAir 47.55
This ratio measures the debt the company has a percentage to the capital employed. Aer lingus has a satisfactory level of debt ratio compared to its total capital employed indicating that the company is mainly financing through equity finance. RyanAir has a higher percentage of debt indicating that the company is financing its needs through long term borrowings as it did not issue any further ordinary shares this year. It also had a buyback of 59.5m of its ordinary shares in 2008(Aer lingus plc, 2008).

4. Interest times earned ratio Aer lingus 2 times, RyanAir 6.45 times
This ratio measures how much the company earns in its earnings before interest and tax to cover its interest expense. Aer lingus has a considerably lower ratio indicating that its not earning enough to cover for the interest expense. This is due to the exceptional cost t ha to bear this year which has decreased its earnings before interest and tax. RyanAir has a satisfactory ratio of 6.45 times, which means that it is earning enough to pay off to the lenders.

Efficiency ratio

1. Asset turnover Aer lingus 68.45, RyanAir 44.88
This ratio determines how efficiently the company is utilizing its assets to earn revenue through them. Aer lingus shows an impressive ratio of 68.45 which indicates it is utilizing its assets quite efficiently. RyanAir has a low asset turnover indicating that assets are not being utilized well enough.

2. Account receivables Turnover Aer lingus 17.623 times, RyanAir 79.74 times
This ratio measures how well the company is doing to recover cash from its receivables, Aer lingus has a 17.623 times accounts receivables turnover ration, which indicates that the company is able to recover cash from debtors in time and maintains good credit terms with them.
Ryan Air has a very high ratio, indicating that the company may be allowing too much of credit period to customers to increase revenue. Though offering attractive credit terms to customers to increase sales is a good policy but in the long term it will harm the company in a way that it will not be able to pay off its obligations or finance its activities from its own resources, as a result company will be forced to borrow more loans.

Investor Ratios

1. Earning per share Aer lingus 0.20 euro cents, RyanAir 0.26 euro cents
This ratio shows the profit earned for the each issued stock, Aer lingus incurred a loss this year so thats why it has a negative earning per share. RyanAir made a profit in 2008 but its earnings per share is still lower considering that it did not issue further share and exercised a buyback option of it issued share capital (Aer lingus plc, 2008).

2. Dividend per share Aer lingus 0, RyanAir 0
This ratio measures the amount of dividend that is declared for the shareholders of the company. Both Aer lingus and RyanAir did not pay out any dividend this year to the shareholders. Although, its beneficial for the companies to retain profits which then can be used to fulfill future finance needs of the company but in the long run, not giving dividends to shareholders might damage the investors confidences in the company. And it will make the companys shares less attractive (Ryan Air Plc, 2008).

3. Dividend payout ratio Aer lingus 0, RyanAir 0
This ratio measures the amount of dividend paid out for the earnings per share. As both the companies did not payout any dividends to the investors so both have a zero ratio.

MeritsDemerits of Aer lingus
The above ratio analysis for Aer lingus shows a deteriorating performance for the year 2008 from the previous year. Although some of the factors that hampered the companys financial performance are uncontrollable for the company, like fuel costs which rose tremendously (almost doubled) from the previous year. The economic downturn also played its role in the companys financial problems, which forced the company to reduce its fares.

Almost all of the profitability ratios apart from the return on capital employed show negative margins. The loss which company incurred was due to the exceptional costs of  140.9m that Aer lingus had to bear. Excluding this non-routine exceptional cost, Aer lingus earned a profit of  21.2m it is also indicated by the positive return of 3.41 on capital employed (Aer lingus plc, 2008). Despite of the economic downturn and crisis in aviation industry, Aer lingus managed to increase the number of passengers from the last year, though it was offset by the reduction in travel fares. The Ancillary revenue increased by 37.7 from the last year, cargo revenue showed a slight increase of 5.5 and the other revenue head also increased by 11.5.

The companys liquidity ratios are not too impressive, which may be a risky sign for the company because it means that the company does not have adequate cash or cash equivalent to meet its obligations, it will lower the confidence of the investors and the lenders who might be unwilling to lend in future. The companys gearing ratios seem satisfactory which shows that Aer lingus has not been depending on borrowing debts for its financing needs. The lesser the gearing level a company keeps, the more the confidence investors show in that company.

Company has performed well in achieving impressive efficiency ratios, and is utilizing its assets efficiently. As the company incurred a loss this year, so it could not afford to pay its shareholders any dividends. Aer lingus managed to cut its cost by implementing a third part maintenance contract which saved more than  20.0m in cost in the first half of 2008.

Analysis of statement of Cash Flows for Aer lingus

Judged by the criteria of relevance and reliability, cash flow statements are an extremely useful source of information for the users of accounts. Users would be interested in the survival of the company which is dependent on its ability to generate cash to pay its payables rather than to make a profit. Cash flow statements are very reliable because they are free from subjective allocation of cost to particular accounting periods, and are free from subjective valuation models that dog the reliability of the balance sheet. With a cash flow statement what you see is what you get.

A provisional review of Aer lingus cash flow statement reveals a net increase of  18,266,000 in cash and cash equivalents in the accounting period. At the last year ended 31 December 2007, Aer lingus had a bank overdraft of ( 12,185,000), where as this year they managed to turn that around and had a positive cash and cash equivalent balance of  6,081 at the year ended December 2008. Below is the detailed analysis of how the cash inflows and outflows took place in the year ended 2008.

Operating Activities
Aer lingus payables increased in this year from the last year, which explains one of the reasons for the net cash and cash equivalent increase. Aer Lingus also received an income tax credit of  5,046,000, further increasing its cash balance.

Investing Activities
During the period the company earned a substantial inflow of cash through finance income which also had a positive impact on cash balance at the year end. Total of  54,798,000 interest was earned by the company under finance income, interest income earned on other financial assets of  4,420,000 and amortization of available-for-sale reserve   1,642,000. There was also an exchange gain on cas-.x

When trying to determine the correct discount rate, corporate financiers calculate a weighted average of the cost of each component or source of finance (capital). The Weighted Average Cost of Capital (WACC) is also known as the opportunity cost of capital (i.e., the amount of return that a rational investor requires for an investment of similar risk) (Arnold, 1998).

The WACC is calculated on an after-tax basis, since free cash flows represent cash available to all providers of capital (Damodaran, 2002). It is imperative to note that when calculating free cash flows there is a deduction of national tax charge from the Earnings Before Interest and Tax (EBIT) to determine Net Operating Profit After Tax (NOPAT).

The formula for the WACC of a company with two sources of capital is set out below (Rappaport, 1998)
WACC  (Kd x (1  t)) x (DT)  Ke x (ET)
Where,
Kd Cost of debt
t Tax rate
D Total debt (market value)
E Total equity (market value)
T Debt  Equity (market values)
Ke Cost of equity.

Calculation of Weighted Average Cost of Capital (WACC)

However, most finance textbooks present the Weighted Average Cost of Capital WACC calculation as
WACC  Kdx x (1  t) x D  Ke x E

Where Kd is the cost of debt before taxes, T is the tax rate, D is the percentage of debt on total value, Ke is the cost of equity and E is the percentage of equity on total value. All of them precise (but not with enough emphasis) that the values to calculate D y E are market values. Although they devote special space and thought to calculate Kd and Ke, little effort is made to the correct calculation of market values.

Case Study Vodafone
Generally speaking, calculation of WACC is relatively simple for small organizations (Adler, 1974). However, for a multinational corporation like Vodafone calculating WACC is a tedious job and requires a lot of number crunching. Therefore, some of the small steps in calculating WACC have not been shown in the paper.

The calculation of Vodafones weighted average cost of capital requires 3-step process

Components of Cost of Capital
First, the cost of each kind of capital that the enterprise uses is calculated or inferred, namely debt and equity (Anderson, 2003).

Debt Capital The cost of debt capital is equivalent to actual or imputed interest rate on the companys debt, adjusted for the tax-deductibility of interest expenses. Specifically
The after-tax cost of debt-capital The Yield-to-Maturity on long-term debt x (1 minus the marginal tax rate in )

Equity Capital Equity shareholders, unlike debt holders, do not demand an explicit return on their capital. However, equity shareholders do face an implicit opportunity cost for investing in a specific company, because they could invest in an alternative company with a similar risk profile. Thus, the opportunity cost of equity capital is also inferred (Cumming, 2005).

Capital Asset Pricing Model (CAPM) CAPM says that equity shareholders demand a minimum rate of return equal to the return from a risk-free investment plus a return for bearing extra risk. This extra risk is often called the equity risk premium, and is equivalent to the risk premium of the market as a whole times a multiplier  called beta  that measures how risky a specific security is relative to the total market (Emery, Douglas, Finnerty, and Stove, 1998).

Thus, the cost of equity capital  Risk-Free Rate  (Betatimes Market Risk Premium).

Capital structure
Next, the proportion that debt and equity capital contribute to the entire enterprise is calculated, using the market values of total debt and equity to reflect the investments on which those investors expect to earn a minimum return.

Weighting the Components
Finally, the cost of each kind of capital by the proportion that each contributes to the entire capital structure is weighted. This results into Weighted Average Cost of Capital (WACC), the average cost of each  employed in the business (Harris and Raviv, 1991).

The following is the summary of WACC calculation for Vodafone
DebtEquityTotalPre-tax cost of debt ()3.8Cost of equity ()8.3After-tax cost of debt ()2.8Market value of debt (, MM)500.0

Market value of equity (, MM)76,272.0Enterprise Value (, MM) 76,772.0Percent of enterprise value ()0.7Percent of enterprise value ()99.3Percent of enterprise value ()100.0Weighted Average Cost of Capital (WACC, )8.3 Data Sources www.vodafone.com
Uses of WACC

Profitability Valuation
Economic indicators emerged with the realisation that profitability per se cannot fully measure value because it does not factor in risks. To measure value, returns must also be compared with the cost of capital employed. Using the cost of financing of a company, WACC, it is possible to assess whether value has been created (i.e., when return on capital employed is higher than the cost of capital employed) or destroyed (i.e., return on capital employed is lower than the cost of capital employed).

Value of Operations
The weighted average cost of capital (WACC) blends the required rates of return for debt (kd) and equity (ke) based on their market-based target values (Harvey, 1991). This is useful because the interest tax shield has been excluded from free cash flow (because interest is tax deductible). Since the interest tax shield has value, it must be incorporated in the valuation. Enterprise DCF values the tax shield by reducing the weighted average cost of capital. By calculating free cash flow as if the company were financed entirely with equity, operating performance across companies and over time without regard to capital structure can be compared. By focusing solely on operations, a cleaner picture of historical performance can be developed, and this leads to better forecasting.

Risk Extraction
A companys WACC already reflects its weighted average risk premium. In theory, the value of the weighted average risk premium could be extracted simply by subtracting the risk-free rate from the WACC. In practice, it is better to follow a slightly different procedure because the company cannot actually borrow at the risk-free rate. Instead of subtracting the risk-free rate, the companys expected after-tax borrowing rate is subtracted (Marino and Matsusaka, 2005)

Weighted Average Risk Premium  WACC - Cost of Debt After Tax
For consistency, financial analysts use the same after-tax cost of debt as used in the WACC. This prevents double-counting the companys credit risk premium in the subsequent calculations. The credit risk premium is the additional interest above the risk-free rate that the company must pay to compensate lenders for the possibility that the company might default on its payments to lenders.

Projecting Risk Premium
The risk-adjusted WACC for a project or for its risk class can be obtained simply by adding to the companys expected WACC the difference between the projects risk premium and the companys risk premium

Adjusted WACC  WACC  (Project Risk Premium - Company Risk Premium)
The resulting risk-adjusted WACC provides discount rates reflecting the differing risks of the companys projects.

Limitations of WACC

Complexity
Although applying the weighted average cost of capital is intuitive and relatively straightforward, it comes with some drawbacks. If one discounts all future cash flows with a constant cost of capital, as most analysts do, one is implicitly assuming the company manages its capital structure to a target rate. For example, if a company plans to increase its debt-to-value ratio, the current cost of capital will understate the expected tax shields. Although the WACC can be adjusted for a changing capital structure, the process is complicated.

Assumptions for Weighting System
Calculation of WACC is based on a critical assumption that the firm will in fact raise capital in the proportions specified. Because the firm raises capital marginally to make marginal investments in projects, analysts need to work with the marginal cost of capital for the firm as a whole. This rate depends on the package of funds employed to finance investment projects. In other words, the concern is with new or incremental capital, not with capital raised in the past. For the WACC to represent a marginal cost, the weights employed must be marginal. That is, weights must correspond to the proportions of financing inputs the firm intends to employ.

Adjusting Flotation Costs
Flotation Costs involved in the sale of debt instruments, preferred stock, or common stock affect the profitability of a forms investments. In many cases, the new issue must be priced below the market price of existing financing. In addition, there are out-of-pocket flotation costs. Owing to flotation costs, the amount of funds the firm receives is less than the price at which the issue is sold. The presence of flotation costs in financing requires that an adjustment be made in the evaluation of investment through WACC.

After-Tax Assumptions
Kdx (1-T), the after tax cost of debt, implies that the tax payments coincides in time with the tax accrual. Some firms could present this payment behaviour, but it is not the rule. Only those that are subject to tax withheld from their customers, pay taxes as soon as they invoice their goods or services. Because of this tax assumption and the existence of changing macroeconomic environment, (say, and inflation rates) WACC changes from period to period.

Use of WACC in International Scenario

WACC versus APV
Given the estimates for cost of equity and after-tax cost of debt, the debt and equity weights need to be derived an estimate of the weighted average cost of capital. In emerging markets, many companies have unusual capital structures compared with their international peers. One reason is, of course, the country risk (Masson, 1990). The possibility of macroeconomic distress makes companies more conservative in setting their leverage. Another reason could be anomalies in the local debt or equity markets. In the long run, when the anomalies are corrected, the companies should expect to converge to a capital structure similar to that of their global competitors. One could forecast explicitly how the company evolves to a capital structure that is more similar to global standards. In that case, using APV approach is a more useful option (Plasschaert, 1985).

Selection of Discount Rate
One question that a company investigating a foreign investment in an emerging market should ask is which hurdle rate should be used There are three different types of discount rates. The first method is to use the corporate WACC. Analysts in favour of using one single corporate WACC argue that a multinational organization can be considered as a portfolio of multiple (global) investments and thus each investment can be treated with the same cost of capital, which reflects the companys total aggregated portfolio risks.

The second method is to consider each investment project as a stand-alone investment and value each of them according to a local WACC that reflects the risks of the local country and project. The third method is a middle-of-the-road approach, which recognizes the need to account for the additional sovereign risk factors in the country of the investment in the WACC. This is achieved by simply adding a sovereign risk premium to the corporate WACC as a mark-up.

International capital structure
The key idea is to seek the lowest WACC in whatever currency it is the least, and then use the conversion rule to measure the WACC in the other currency. It is important to use the interest rate on risk-free T-bills for conversion purposes. That allows the costs of capital to be adjusted for different inflationary expectations, as in the Fisher equation. It is appropriate to consolidate all debt and equity at current exchange rates in order to correctly measure the debt-to-equity ratio for global operations.

Specific Risk Adjustments in the WACC
Calculating the WACC in developed markets can be a complicated exercise, but the calculation in emerging market environments is even more demanding. As well as the different and additional risks mentioned, emerging markets are also less developed, liquid and accordingly less efficient. In other words, reliable information for the determination of the WACC will be harder to obtain.

Cost of equity
The first component of the WACC is the cost of equity. In developed markets the capital asset pricing model (CAPM) is mostly applied to estimate the cost of equity of an investment. But CAPM has one significant underlying theoretical assumption, which is that it assumes that markets are fully integrated and efficient. However, there is proof to conclude that emerging markets are not efficient. For fully segmented emerging markets it can even be argued that CAPM is unsuitable compared to WACC for estimating the cost of equity, as the equity prices are not determined by equilibrium situations due to inefficiencies and poor liquidity.

The design of the spreadsheet is important since it presents the information needed by the users. In accounting, spreadsheets are used to keep records needed by the bookkeeper or accountant for data presentation. The importance of spreadsheet can be seen in the increasing number of individuals making use of it for an ease in tracking records.

The spreadsheet is designed in such a way that the users of it, including the beginners, could easily understand what the data presents. Few colors are used so as not to confuse the users. Formulas are embedded in order for the totals to automatically adjust whenever modification is necessary. In table1, the total of the direct cost for building the Econo-Bike will automatically adjust whenever changes in the direct costs are made. Moreover, if changes in the variables are made, the graph will automatically be adjusted to provide the exact conversion of each variable. However, users should retain the formula embedded in the spreadsheet. The formula is the device that made possible the automatic adjustments in the totals. The same procedures are made in all of the tables in the spreadsheet. In table 1 and 2, the number of hours and the rate per hour can be adjusted thus, would also change the amount for each direct labor, further, would also adjust the total cost. In tables 3 and 4, when modifications are made in the number of units produced per year the total direct cost for building each of the product will adjust automatically. In accounting, the quantity of the product is always changing since the quantity depends on the number of products produced, purchased, sold and other related activities performed by the enterprise.

The use of a pie chart is the most appropriate of all the graphs for this case since it provides an ease in knowing which of the factors has the largest fraction in the total cost. Also, the pie as a whole represents the total cost and the cuts made in the pie represents the fraction eaten by the contributors in the total cost such as carbon fibre frames, fork, wheels, components, saddle and handlebars, direct labor (workshop) and direct labor (finishing). The charts are correctly labeled in order for it not to be misleading. The portion of the pie that has the biggest cut is said to be the contributor that contributes the most in the total cost. In the case of table 1 it can be seen that carbon fibre frames has the largest portion in the total cost since it occupies almost one-third of the whole pie. For table 2, wages in quality control department contributes the biggest since it is the portion of the pie that is said to be the biggest.

Accurate financial statements are very important for outside business interests. The users of financial statements, such as customers, suppliers, creditors, need accurate financial statements for better decision making activities.   In addition to this, tax collection agencies, community residents and stock market agents need accurate financial statements for deciding on their next move.

There are many users of financial statements, namely, customers, suppliers, creditors, tax collection agencies etc. Certain companies, like Enron and WorldCom, issue fraudulent financial statements. Auditing brings credence in terms of the fairness of financial statements. Accurate financial statements are important for outside business interests (Pride, 2008).

Customers
Customers need accurate financial statements to determine if the company will continue supplying goods or services satisfying their needs.  The clients require a financial statement showing net profits of a company. It is a sign that the company will continue to serve their business or personal needs for another year. A financial statement showing net losses will indicates a negative aspect, serving a sign that the company may not be able to continue meeting their business or personal needs for another year.  The customers do not need to worry if the company generates considerable profits.
     
On the other hand, the customers may start to look for other alternative suppliers, if the financial statements indicate a net loss. A false financial statement indicating net profits, instead of the actual net losses, would bring a wrong message to the customers. In this case, the clients will after all be surprised to find that the company will close down due to bankruptcy. The clients will then have less time to search for other suppliers of customer needs.  This falls under the concern concept of the United States Generally Accepted Accounting Principles (Bragg, 2001).

Suppliers 
Suppliers need accurate financial statements to determine, if the company continues to buy their products. A financial statement showing net profits will satisfy the companys suppliers, as this is a sign that the company will continue to buy their products for another year. A financial statement showing net losses will be perceived negatively by the suppliers, as this is a sign that the company may not be able to continue satisfying their business or personal needs with the suppliers goods or services for another year.
     
Furthermore, the suppliers do not need to worry, if the company generates profits. On the other hand, the suppliers may start to look for other alternative companies to serve, if the financial statements indicate a net loss. A false financial statement indicating net profits, instead of the actual net losses, would bring a wrong signal to the suppliers. In this case, the suppliers will be surprised to find that the company will shut down within one year. The suppliers will then have less time to search for other companies to serve (Rittenberg, 2009).

Creditors
Creditors need accurate financial statements to determine, if the company continues to avail of credit services. A financial statement showing net profits will give the general credit picture of the company. It is a sign that the company will be able to pay for their maturing obligations on time for another year. A financial statement showing net losses will not be good in the eyes of the creditors. It is a signal that the company may not be able to continue pay their maturing loans and other payables for another year.
   
Furthermore, the creditors do not need to be concerned, if the company generates profits. On the other hand, the creditors may start to look for other alternative companies to serve, if the financial statements indicate a net loss. A false financial statement indicating net profits, instead of the actual net loss, would bring a wrong signal to the customers. In this case, the creditors will be surprised to discover that the company will close down due to bankruptcy. In the same light, the creditors will have less time to search for other companies to offer credit terms (Rittenberg, 2009).

Tax collection agencies
Tax collection agencies need accurate financial statements to determine if the company can pay their taxes. A financial statement showing net profits will indicate the companies will be able to pay higher taxes. It is a sign that the company will continue to pay taxes for another year. A financial statement showing net losses will be perceived negatively by the tax agencies. It is a signal that the company may not be able to continue paying similar tax amounts for another year.
     
Further, the tax agencies do not need to worry, if the company generates profits. On the other hand, the tax agencies may start to scrutinize the financial statements to determine if the company falsified the financial reports in a net loss situation. Some companies reduce net income or present net loss. A false financial statement indicating net loss, instead of the actual net income, would bring a wrong signal to the tax agencies. In this case, the tax agencies must scrutinize the financial statements for fraud (Covello, 2006).

Community residents
Community residents need accurate financial statements to determine, whether the company will hire local residents. A financial statement showing net profits will be perceived positively by the residents. It is a sign that the company will continue to hire new staff for another year. A financial statement showing net loss will diminish their chances for employment in the company. It is a signal that the company may not be able to continue hiring community residents for another year. The community residents do not need to worry if the company generates profits.
     
On the other hand, the community residents may start to look for other companies to work for, if the financial statements indicate a net loss. A false financial statement indicating net profits, instead of the actual net losses, would bring a wrong signal to the community residents. In this case, the community residents will be surprised to find out that the company will stop hiring the community residents within one year. The community residents will have lesser time to find another job in the community (Cunnighham, 2002).

Stock market agents
Stock market agents need accurate financial statements to determine, if the company is a good investment alternative. A financial statement showing net profits will make stock market agents proud to sell the company to prospective investors. It is a sign that the company will continue to be a viable investment opportunity for another year. A financial statement showing net losses will not bring a good picture in the eyes of the stock market agents. It is a signal that the prospective investors will shy away from the company as an investment option for another year.
     
Furthermore, the stock market agents do not need to worry, if the company generates profits. On the other hand, the stock market agents may start to look for other alternative companies to sell in the stock market, if the financial statements will indicate a net loss. A false financial statement showing a net profit, instead of the actual net loss, would give a wrong signal to the stock market agents. In this case, the stock market agents will be surprised to discover that the company will stop operations within one year. The stock market agents will then have lesser time to find other companies to sell (Cunnighham, 2002).

Environmental groups 
Environmental groups need accurate financial statements to determine, if the company implements environmental laws. A financial statement showing amounts spent to install environmentfriendly assets will make the environmental groups happy. It is a sign that the company will continue to implement environmental procedures within its premises for another year. A financial statement showing the absence of environment friendly assets like anti  smoke pollution (high smoke exhaust stack) features will not be good in the eyes of the suppliers. It is a signal that the company may not be able to continue complying with anti pollution statutes for another year.
     
In addition, the environmental groups do not need to worry if the company invests in anti pollution devices. On the other hand, the environmental groups may investigate why the company does not include anti pollution devices among its expenses or assets enumerated in the financial statements. A false financial statement indicating the company invested in anti pollution devices, instead of the actual position where nothing was funneled into anti pollution spending, would bring a wrong signal to the environmental agencies. In this case, the environmental group may be surprised to find that the company closed shut down within one year because another environmental agency group will penalize the company for violating anti pollution and other environmental policies (Bragg, 2001).

Current investors
Current investors need accurate financial statements to determine if the company will continue distributing dividends. A financial statement showing net profits will make current investors happy. It is a sign that the company will continue to give dividends for another year. A financial statement showing net loss will not be good in the eyes of the current investors. It is a signal that the company may not be able to continue offering dividends for another year.
       
Further, the current investors do not need to worry if the company generates profits. On the other hand, the current investors may start to look for other alternative companies to invest their cash and other assets if the financial statements will indicate a net loss. A false financial statement indicating net profit, instead of the actual net loss, would bring a wrong signal to the current investors. In this case, the current investors will be surprised to find the company closed shut down within one year. The current investors will then have lesser time to search for other companies to invest their money and other assets (Larson, 2003).

Prospective investors
Prospective investors need accurate financial statements to determine if the company will be a good investment. Financial statements showing net profits will bring more investors into the company. This will make prospective investors happy. It is a sign that the company will continue to give dividends for another year. A financial statement showing net loss will not be good in the eyes of the current investors. This is clear landmark indicating the company will not be able to offer dividends for another year. The prospective investors do not need to worry if the company generates profits. On the other hand, the same prospective investors may search for other alternative companies to invest their cash and other assets if the financial statements will indicate a net loss.
   
In addition, a false financial statement indicating net profit, instead of the actual net loss, would bring a wrong signal to the prospective investors. In this situation, the prospective investors will be surprised to find the company will not release dividend payments to prospective investors within one year. The prospective investors will then have lesser time to search for other companies to put their hard-earned money and other assets (Larson, 2003).
     
City Planners
City planners need accurate financial statements to determine the ways of improving the local economy. Financial statements showing net profits will persuade the local planners to construct bigger roads, and other infrastructure to increase the current movement of goods and services between the clients and the companys premises. Road widening will make both the clients and the manufacturing companies happy. A financial statement showing net loss will tempt the city planners to forego road expansion.
     
Further, a net loss may indicated to the city planners that it would be useless to widen the roads from the company to the clients because there is a strong probability that the company may close shop within one year from the income statement date. A false financial statement indicating net profits, instead of the actual net losses, would bring a wrong signal to the city planners. In this situation, the city planners will be surprised to find the company shutting operations within one year. The city planners will then feel that the road expansion was a waste of tax payers money (Pride, 2008).

Conclusion      
All things considered, accurate financial statements are crucial for outside business interests. First, customers need accurate financial statements to determine if the company will continue to fill the clients needs. Second, suppliers need accurate financial statements to determine if the company will continue to purchase from the suppliers. Third, creditors need accurate financial statements to determine if the company will continue using credit. Fourth, tax collection agencies need accurate financial statements to determine if the company will continue paying taxes. Fifth, community residents need accurate financial statements to determine if the company will employ local residents.  Sixth, stock market agents need accurate financial statements to determine if the company is a good investment choice. Seventh, environmental groups need accurate financial statements to determine if the company obeys environmental laws. Eight, current investors need accurate financial statements to determine if the company will continue dividend payout. Ninth, prospective investors need accurate financial statements to determine if the company will be a good investment venue. Tenth, city planners need accurate financial statements to determine ways of advancing the local economy. Indeed, accurate financial statements are essential for outside business interests.

As per the lease agreement with Goliath Co. signed on December 15, 2004, the Big Bear Company in compliance with the definition of rental provided in section 13 of the Financial Accounting Standards Board (FSAB) hereby recognized that this type of lease fall under the category of minimum lease payments. Less payment under this category depend on existing factors on which payments are made and are measurable at the time of inception (Statement of Financial Accounting Standards No. 29, p. 4).

Given the information above, the provisions that are factors to this agreement have been carefully analyzed and found out that of the three provisions it appears that only two should be included in the minimum lease payments. These are provision 2 and provision 3 in view of the FASB ruling that minimum lease payment should only include actual monthly rentals plus the executory costs excluding repair expense, insurance fees, and the required tax expense.

Facts
December 15, 2004, Big Bear signed a lease agreement with Goliath Co for a ten year non- On cancelable term to lease a combustion turbine for one million dollars payable ratably over 12 months. Under provisions 1, Big Bear paid five hundred thousand dollars to its legal council that handled the negotiation and agreed to pay the legal fees incurred by the Goliath Co in the amount of one million dollars aside from the annual lease payments in the amount of million dollars payable over twelve moths as stated in provisions three. Big Bear also recognized that in the event that Big Bears bank declares default under its primary credit arrangement, Big Bear will be required  to pay penalty particularly if there a material adverse change in its financial condition.  

Research (Discussions)
Ryan (2007) defined minimum lease payments as the payments the lessee is required to make over the lease term in connection with the leased property (Ryan, p. 359). Minimum payment according to him include guarantees by the lessee of the residual value of the leased asset and penalties the lessee is required to make at the end of the lease term if the lease payments is not renewed (p. 359). Ryan emphasized that minimum payment do not include contingent rentals, guaranteed by the lessee of the lessors debt, or executory costs such as those mentioned earlier.  The FASBs FAS 13 status also confirms that the lessee can only be required to pay    

Ryan, S. (2007) Financial Instruments and Institution Accounting and Disclosure USA John Wiley and Sons
httpwww.xavierpaper.comdocumentsusgaapn.Fas29.pdf On December 15, 2004, Big Bear signed an agreement with Goliath Co for a ten year non-cancelable term to lease a combustion turbine for one million dollars payable ratably over 12 months. Under provision 1, Big Bear paid five hundred thousand dollars to its legal council who negotiated the deal and agreed to pay the legal fees incurred by Goliath Co amounting to one million dollars, aside from the annual lease payments in the same amount stated in provision three. Big Bear also recognized that in the event that Big Bears bank declares default under its primary credit arrangement, Big Bear will be required  to pay penalty particularly if there is a material adverse change in its financial condition.    

Research (Discussions) -
Ryan (2007) defined minimum lease payments as the payments the lessee is required to make over the lease term in connection with the leased property (p. 359). Minimum payment according to him include guarantees by the lessee of the residual value of the leased asset and penalties the lessee is required to make at the end of the lease term if the lease payments is not renewed (p. 359). Ryan emphasized that minimum payment does not include contingent rentals, guaranteed by the lessee of the lessors debt, or executory costs such as those mentioned earlier.  The FASBs FAS 13 status also confirms that the lessee can only be required to pay in connection with leased property.    

Provision 1 revealed that Big Bear made other payment aside from the usual rental payment which clearly do not include in the minimum lease payment. This makes it clear that the costs as well as the potential cost associated to the provision could not be included in the minimum lease payment as defined by Ryan and as stated in the FASBs FAS 13 because these payments are not required in connection with the lease term. The payments mentioned in provisions 2 and 3 however, can be included in the minimum lease payments because they were obviously required in the lease agreement.

Provision 2 for instance stated that in case of a default provision in the lease, Big Bear will be required to pay penalty payment. According to FASB Emerging Issues Task Force, penalty payment is part of the bargain renewal options to which failure on the part of the lessee to abide in the lease terms at the inception of a lease will incur penalty on the part of the lessee (FASB Emerging Issues Task Force, p. 2). Provision 2 therefore should be included in the minimum lease payment in view of the fact that penalty payments are part of the lease terms agreement and is therefore required in making the lease terms.

Provision 3 on the other hand, talks about the required rental or lease payment in the amount of one million dollars payable ratably over twelve months for the next ten years. The payments mentioned in this provision including the interest rate are required in making the lease terms. But the main ground for the inclusion of these two provisions in the minimum lease payment is the fact the factor by which the lease payment depends exists and is measurable at the time of inception of the lease. Apparently, factors to which lease payment depend do not exist in provision one and therefore should not be included in the minimum lease payment.

Conclusion
Given the circumstance behind lease payments, it is important that a lessee settle on the lease term at the inception of a lease. In this way, technical problems arising from lack of concrete knowledge of the terms and agreement stipulated in the lease contract can be avoided. It is therefore important to determine the exact contents of the agreement including the duration, the residual value and every provision in the lease agreement not only to avoid technical problems but also to reduce expenses by negotiating with the lessor potential options. Fishman (2008) aptly stated that determining how long a lease lasts will determine whether you can currently deduct expense or have to deduct it over the entire leased terms (p. 187). Furthermore, in case the lessee opted to buy the property at the end of the lease contract, determining the residual value of the property beforehand, can help the lessee decide whether to buy the leased property or to purchase brand new.

In terms of audit and assurance, going concern assumption is a management assertion where an entity is perceived as continuing its routine business operations in the foreseeable future (which is an accounting period usually 12 months). ISA 570 is the auditing standard issued by the International Auditing and Assurance Standards Board (IAASB) which explains the requirements necessary for verification of the going concern assumption.

ISA 570 states that  When preparing and performing audit procedures and in evaluating the results thereof, the auditor should consider the appropriateness of managements use of the going concern assumption in the preparation of the financial statements and consider any relevant disclosures in the financial statements (as cited in Redrafted ISA 570 issued by the IAASB)

Auditors responsibilities

Auditors have numerous responsibilities when considering the appropriateness of the going concern assumption for instance

To look for any material uncertainties regarding the going concern assumption and the need to disclose them in final accounts if any.

Similarly, they should look for any events, conditions or other relevant risks which may cast doubts over an entitys ability to continue as a going concern.

The procedures used by management to ascertain as to whether the entity is a going concern also needs to be assessed.

Possible indications of going concern issues should also be looked into in detail for instance financial, operating or other indications.

Going concern assumption used by management also needs to assessed.

The assessment period in use by the management should also be considered, and in case if its less than twelve months then auditors should ask the management to extend the assessment period to 12 months.
Managements future action plans also need to be considered.

Audit procedures in connection with ISA 570

As per ISA 570, Auditors are specifically required to carry out the following audit procedures

Review managements future action plans in contrast with its going concern assumption. Moreover auditors should also seek to obtain written representations from management regarding their future plans since their action plans are a mere forecast and hence potentially uncertain.

Cashflow, profit and other relevant forecasts also need to be discussed with the management and analyzed whether they adequately reflect the entitys ability to continue as a going concern.

Similarly, an entitys latest interim financial statements (also known as management accounts) probably for the last quarter should also be discussed with the management in order to obtain a better understanding which would subsequently assist auditors in their analysis.

Terms and conditions of debentures and loan agreements should be reviewed as well since they will provide significant insight into companys leverage position and hence bring to light if the company is or will face problems in discharging its obligations which could cast shadow over its functioning as a going concern.
Minutes of AGM, EGM (if any) or any other board and committee (i.e. audit committee, remuneration committee) meeting should be thoroughly read. There is empirical evidence that board minutes have been instrumental in providing references to financial difficulties.

An entitys legal personnel also need to consulted and information about any litigation or claims which could significantly affect its going concern assumption should be obtained. Such cases not only be reviewed independently by the auditors but also discussed with the legal counsel in order to fully understand the gravity of the matter.

Arrangements with related and third parties should also be confirmed for their legality and the ability of such parties should be assessed whether or not they can provide financial help.

ISA 570 further guides auditors on in determining their audit opinion after performing audit procedures on an entitys financial statements. Following are the types of opinion an auditor can express owing to the different types of situation. (Elearning.com, n.d)

Reporting and types of opinion

Emphasis of matter
Instances where material uncertainties are found and management agrees to disclose them in their financial statements, then auditors will give an unqualified opinion but include an emphasis of matter para which will briefly mention the situation and guide to a more detailed note in the financial statements.

Adverse opinion
Instances where material uncertainties are found and their magnitude is such that even disclosing them in the financial statements cannot allow the entity to present its financial statements on the going concern assumption will call for an adverse opinion, since it will not be able to function as a going concern.

Disclaimer opinion
Instances where material uncertainties are found and the management refuses to disclose them in the financial statements, then the auditors should express a disclaimer

However ISA also guides that auditors should extensively discuss the matter with the management and try persuade them to make appropriate disclosures before deciding to give a qualified opinion.

Proposed changes and developments in ISA 570
Owing to the evolution of business methodologies, auditing requirements also need to be updated with the passage of time. Hence the IAASB issues exposure drafts (ED) for its auditing standards when recommending or proposing any modifications to a standard.

In February, 2007 IAASB issued an ED on ISA 570 Going Concern which introduced changes which were largely focused at increasing the clarity of the standard in order to make it more useful for auditors to implement the standard.

Huge corporate failures over the years for example that of Enron and WorldCom among numerous others have forced the IAASB along with other professional bodies to consistently update their standards such that they are more reflective of the prevalent business practices and are effective enough to verify an entitys financial performance. (Accaglobal.com, n.d)

Proposed Modifications
Increased guidance has been provided for smaller or unlisted entities and public sector or government funded entities. Although smaller entities or public sector entities do not have a statutory requirement to follow ISA 570 or any other auditing standard but adherence to the standard can result in improved and more accurate reporting.

It has also been proposed that public sector entities particularly those which are funded by the government, would be required to follow this standard where there funding is discontinued.

Moreover the ED has also provided guidance on circumstances where an entity cannot continue as a going concern and hence cannot present its financial statements in that manner. In such circumstances, an entity can prepare special purpose financial statements which would be more accurately reflective of their situation (IFAC, 2007)

Further emphasis has been made on performance of risk assessment procedures. Auditors are now increasingly required to perform risk assessment procedures in order to provide greater insight into the adequacy of an entitys internal control function. (ICAEW, April, 2009)

Criticisms of the changes made
The ED on ISA 570 has received both positive and adverse views for different factions of the business community.

Pubic sector and smaller entities are an important part of the business community and therefore they should be provided necessary guidance on using the going concern assumption. Application and Other Explanatory Material section has although been adequately explained for public sector companies but such consistency is not found for smaller entities and has therefore been subject to criticism.

Similarly, the importance of risk assessment procedures in evaluating an entitys going concern ability has been heavily criticized for the wording used, which is largely misleading and in fact has made the importance of risk assessment procedures secondary to the evaluation of managements assessment methods when they should considered independently. (CGA-Ontario.org, n.d)

The evaluation of a managements assessment method has been discussed in more than two places and is therefore considered  unnecessary when it could have been shown in A  OE sections of the ED.

Auditors responsibility to correct the lack of analysis on managements part is too much of a secondary nature matter and therefore it should have been included in the AOE section, since its misleading here. (Accaglobal.com, n.d)

Adverse opinion is usually given when an entity can not continue as a going concern whether or not appropriate disclosure is given, wording used by the standard in explaining this matter has been criticized for being excessive and misleading.

Similarly, guidance on audit opinions have been discussed more than once and due to this repetition it has greatly affected the readability of the standard hence giving rise to ambiguity.

Communication of audit matters with directors of an entity is although essential but not a constituent of the core requirements of the standards.

In the wake of the global economic crisis which caused financial distress around the globe resulting in pre-mature closure of companies which had been performing extensively well prior the credit crunch. Such instances resulted in unanticipated losses for millions and brought the accounting and auditing profession into spotlight for not doing enough to prevent such abrupt bankruptcies and liquidations which cost a fortune to many. (Accaglobal.com, 2008)

Therefore in a report issued by the ICAEW it was emphasized that increased guidance is provided to directors in order to assist them in evaluating their entitys appropriateness as a going concern.

The report also emphasized the need to update the going concern standard on a more consistent basis so that they remain in line with the existing business practices.

Moreover this report also highlighted the need to delete parts of the standard which were getting repetitive or increasingly irrelevant with the changing business scenario. (ICAEW, 2008)

Conclusions
ISA 570 provides a detailed guideline for both auditors and management alike in determining an entitys ability to continue as a going concern.

Furthermore, they extensively determine the responsibilities of both auditors and management in determining the appropriateness of the going concern assumption.

Similarly, relevant audit procedures and suggested management actions are also mentioned in detail.
Moreover the proposed changes made to the standard have improved the clarity of the requirements and subsequent actions when evaluating the appropriateness of the going concern assumption.

Recommendation
Considering the discussion above, it can be suggested the ISA 570 should be more specific in determining audit requirements. This will help auditors in designing their audit procedures in a likewise manner.

Discuss the corporate culture at WorldCom and how it contributed to the accounting fraud.

WorldCom started expanding a lot because of which the different people in the organization became very distant. People did not know others in the organization because of which the communication became very weak. Each department had formed its own culture and they were following it.

The culture was very bureaucratic and all the communication was top to down. The lower level of management was given the authority to question the seniors in the organization. The employees were expected to do whatever their higher staff told them, no matter how unethical it was. The people were not awarded on the basis of merit. The employees also felt helpless and did not know who to talk about their problems.

Such practices in the culture of the organization encourage people to hide information and do not disclose it. People who were bothered to report activities were not given the authority to raise their concerns. They did not know who to contact and where to express their concerns. The environment was such which supported the activities of misrepresenting information. As a result, the accounting information was incorrectly stated which resulted in the accounting fraud.

Discuss how the CEOs desire to be the 1 stock on Wall Street contributed to the fraud.

According to the CEOs desire to be the Number 1 stock on Wall Street, the employees in the organization set their eyes on increasing the revenue. This was the only way the price of the company shares would increase. In order to gain this goal of increasing the revenue, people started doing whatever they could. They started spending and making investments which were not beneficial for the organization in the long term. They entered into long term fixed rate leases for network capacities in order to meet the increasing demand of its customer base. The broader picture was ignored which led to the fraud. The demand for telecommunication later on fell and during the time it was low, the company was paying for these leases for no reason. Some companies left the industry and the ones that stayed reduced the prices so much that WorldCom was forced to match. The company tried to maintain the Expense to Revenue ratio and in this attempt, it used accrual releases and expense capitalization which are accounting tactics used to achieve targeted performance.

Given the pressure on Accountants to book and release accruals to meet expected results, how might an Accountant go about handling this type of situation

This is a very complicated situation which often puts people like these accountants in a very difficult situation. There is a dilemma and the people have to make a choice. Each choice will have a different result. What choice the person makes depends from case to case. In such a situation where there is pressure from the higher ups, a lower level employee can use a method called whistle blowing. In this method, the lower level of employee contacts anyone who can be of help if he or she feels that there is some wrong happening in the organization (Kietzman, S., 2003). However, it is very important that the employee knows the right person who can be told in such a situation. When using whistle blowing, there are a number of factors that need to be kept in account. These include the seriousness of wrong being done in the organization or whether an action will be taken against the person doing the wrong or not.

Whistle blowing can be done internally or externally. Internal whistle blowing is when an employee tells someone about the wrong happening in the organization within the organization only. For instance, if an employee tells another employee about something wrong happening in the organization, it would be internal whistle blowing. On the other hand, we have external whistle blowing. This is when the employee tells someone from outside the organization about something wrong thats happening within the organization. An example of this could be informing the law enforcement agency about something wrong happening in the organization (Kietzman, S., 2003).  

Discuss the pros and cons of whistle blowing. Would you be more likely to blow the whistle or not Explain your answer.

Although it seems like whistle blowing does not have any pros, it is not the case. Firstly, whistle blowing allows once to have a clear conscience. When you know that you did whatever was in your hands, you feel relieved. In addition to this, it makes people around you believe that you will always deal with situation honestly, no matter what. In short, it would make you and others feel good about yourself (Young, A.S, 2002).

On the other hand, there are also drawbacks of whistle blowing. When an employee reports of something wrong happening in an organization, the guilty person might take an action against that employee which may harm him or her. Getting threatened, mental pressure, being intimidated are some of the very few outcomes of whistle blowing (Young, A.S, 2002).

It takes a lot of courage to blow the whistle and because of this many people do not do it. The bitter fact is that it is never a safe move. When an employee points out something wrong that is taking place within the organization, it could always backfire and the employee will not get anything out of it. However, when someone has faith in their decision and themselves, they do not hesitate.

As mentioned before, I would consider a number of factors before I actually blow the whistle. I would have to keep in mind whats at stake. Only once I have weighed both the sides, I will decide whether I will blow the whistle or not. Therefore, my response to this is very situation specific.

Discuss the creditability of the Accounting Profession when Corporate fraud is unveiled.

When people talk about corporate frauds, the accounting department is mostly in one way or the other way responsible. This often makes the people believe that the accounting profession is not credible. It is true that the accounting personnel have a lot of chances of committing fraud and this is what makes the profession so difficult. There is this trust that needs to be developed and then only the employee can properly form.

There are a number of restrictions that accounting personnel must follow and standards that they must meet.  One relevant to the case concept that is often used is Statements of Financial Accounting Concepts No. 1 which is Objectives of Financial Reporting by Business Enterprises. According to this, financial reporting is always done for an objective. In this case, financial reporting was misrepresented in order to make the companys reality different from what it actually was (Financial Accounting Standards Board, 2008).

Statement of Financial Accounting Concepts No. 5 which is Recognition and Measurement in Financial Statements of Business Enterprises is another statement that applies to this case. This statement outlines what information should be included in the financial statements and how this information should be measured.

I do not think that the existence of corporate fraud would affect the credibility of the profession as a whole because this would be stereotyping. A lot of corporate frauds are done by people in other departments therefore it does not make sense to doubt their credibility. Therefore, corporate fraud like the one at WorldCom does not affect the creditability of the accounting profession to any extent.