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.
-.oOo -
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