Tuesday, October 16, 2012

Assignment 2 (TSMANACC): Recent Accounting Scandal and the Related Unethical Accounting Practices





Ateneo Graduate School of Business
Managerial Accounting
Assignment 2


  
Submitted to:
Professor Ricardo Palo
TSMANACC



Submitted by:
A.R.
16 October 2012

Founded in November 2008, Groupon (NASDAQ:GRPN) pioneered the online daily deals market, which offers subscribers deep discounts on everything from restaurant meals to tech gadgets to weekend getaways.[i]  Groupon has been taking an aggressive approach to several line items in their financial statements. Recording revenues gross of what they owed to merchants for the coupons they peddle is one SEC forced them to adjust.[ii]  On 30 March 2012, Groupon announced that it would slash its fourth-quarter revenue outlook and incur deeper losses as a result of higher-than-expected customer refunds.    On 02 April 2012, the trading day immediately following the announcement, Groupon’s stock plunge 14% as its first-as-a-public company 10-K filing with the Securities and Exchange Commission revealed that its auditor, Ernst and Young, found a “a material weakness in its internal control over financial statement close process.”[iii]
Groupon has taken “aggressive” accounting in terms of not providing for potential customer refunds, when it had to.  This has resulted to bloated revenues in the earlier quarters of the year and massive refunds waiting at the later quarter of the year.   Investors had relied on the available financial information at that time only to be informed subsequently by Groupon that revenues are “bloated” and a “restatement” will be made.  Investors have already made decisions based on the financial information  available at that time and now they hold on to their shares just for them to see how the share prices had plunged by 14%.   Although we cannot establish at this point whether there has been or there has been no deliberate misrepresentation of information, the immediate victim will always be the investors.  
It could be seen that there have been a loss of investor confidence from the first day it had listed its shares in NASDAQ when its stock price was sold initially at $26.11 per share.  On 30 March 2012, the date of the announcement of restatement, stocks plunged to $18.38 per share, which continues its downward trend to $5.20 on 15 October 2012.[iv]   This is a staggering 80% loss in value!
Groupon, as a business has also its share of defeat because of the unethical practice of its management.   As Groupon’s market capitalization and stock prices has decreased exponentially, Groupon’s cost to raise capital has increased, thereby stripping the business of ability to pursue available opportunities for growth.  Groupon may have to resort to costly debt or costly share issuances for it to support any viable business opportunity that it would want to dwell into for growth and the opportunity costs are just too high to afford.  The end of the story may be a flat growth for Groupon.
More importantly, as a customer of Groupon, the confidence that I have with their business and products has been tainted.  Although, the accounting scandal that Groupon is currently facing has no direct impact on my daily affairs as a customer, it made me feel that Groupon really does not care much about its stakeholders at all, less if at all for its customers. 



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Assignment 1 (TSMANACC): Ethical Dimensions of Financial Accounting with Respect to the Keeping of Two Sets of Records.





Ateneo Graduate School of Business
Managerial Accounting
Assignment 1


Submitted to:
Professor Ricardo Palo
TSMANACC



Submitted by:
A.R.
16 October 2012

Financial accounting serves to provide useful financial information to help stakeholders make economic decisions through financial reports.  There are various stakeholders that use financial reports to promote their varying interests.  Among the various stakeholders with varying interests are management and tax authorities.  Management has a fiduciary duty to its shareholders in maximizing profits as they are the appointed “steward” of the organization’s resources and affairs.  Management use financial accounting to assist them in making business decisions.  Tax authorities on the other hand use financial reports prepared by the management, as a basis for computing taxes due to the government to foster its initiatives. 
If the management has a duty to maximize the profits to its shareholders, then it should be seen as unethical to consider the interests of anyone else.[i]  Paying higher taxes could be seen as something that is in breach of management’s duty to the shareholders if the organization could have the opportunity to pay lower or zero tax through effective tax management.  Lower performance result means lower taxes payable to tax authorities and higher shareholder’s return.  While paying correct taxes will benefit the general public, the management has neither duty nor legal obligation to foster the interest of parties not privy to its affairs.  In this pursuit, management is inclined to keep two sets of records, one that present accurate performance result and another record that support lower performance results. 
It should also be seen as unethical for the tax authorities to “use” the financial reports prepared by management in fostering tax authorities’ interest (i.e. to use as a basis for computing taxes).  If parties external to the organization, such as tax authorities need to foster self-interest objective like tax collection, then it should have its own means to gather the necessary information.  It could be seen that organizations are compelled by tax authorities to give “evidence” that will likely self-incriminate these organizations on a tax case or providing useful information which will ultimately be used against these organizations.
It is also seen as unethical to report information that are bias or that caters only to the specific needs of certain group of stakeholders (i.e. stockholders) at the disadvantage of other stakeholders (i.e. tax authorities), therefore supporting the conclusion that organizations should not keep two sets of records.  However, the counter argument is that the basis of accounting used for taxation and internal reporting are different, thus keeping two sets of records is paramount.  The basis of accounting used by tax authorities are based primarily of the provisions on National Internal Revenue Code (NIRC) while the basis of accounting used for internal reports in the Philippines is primarily based from Philippine Financial Reporting Standards (PFRS) and there are a number of conflicting measurement basis between NIRC and PFRS that affect financial information.
More importantly, it is unethical and legally unacceptable to maintain two sets of records if the primary objective is to deliberately evade taxes.  Evading taxes has negative legal, moral and social implications and thus can be construed as unethical.  While the management is the “agent” of its shareholders, management is legally bound to report accurate financial information as the stakeholder of financial information also encompasses the general public (i.e. customer, suppliers, communities, etc.).
On the basis of the above mentioned ethical considerations, it is not surprising why there are organizations that are pro and against preparing two sets of records as there are strong arguments against and in support of using two sets of records.  Different set of books are kept because there are different accounting bases.  Moreover, different users have different and conflicting interests; therefore keeping two sets of records might be essential.  In the contrary, financial information are suppose to be intended for use of the general users whether it is internal or external to the organization, therefore it should be reasonably fair and not biased.
In closing, financial accounting information is intended both for managers and also for the use of parties external to the organization (i.e. taxation authorities).[ii]  Therefore, there is no need to keep two sets of record since financial accounting information serves the interest of both the management and the taxation authorities.  While there are differences in accounting bases, such differences can be reconciled and reported to the management or taxation authorities as necessary.
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[i] Friedman, Milton (1970-09-13), “The Social Responsibility of Business to Increase its Profits. The New York Time Magazine
[ii] Garrison, Noreen, Brewer, Cheng and Yuen (2012). Managerial Accounting, An Asian Perspective. The McGraw-Hill Education(Asia)
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