Financial Management Essay: Chaos & Crisis

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We present you an example of Financial Management Essays, “Financial Management, Chaos & Crisis” written by our expert writers.

Financial Management, Chaos & Crisis

Introduction

The financial growth of big companies may affect the economy of the whole country. The liberalization of the banking sector and power of the huge companies constitute an environment in which a few company directors or bank managers determine the financial statements. The stock market is dominated by these companies, and all the other factors of states are affected by this situation. The political decisions may also differ because of a gross of rich men. The leading of a small class on the economy opens the road to the financial chaos and also crisis.

Body Paragraphs

Charles Ferguson directed the movie 'Inside Job' to focus on how the financial service sector and the policy environment caused the 2008 crisis. In the film, people from the countries, primarily the United States of America, around the world, identify how they were affected in that collapse. Ferguson pointed out the effect of Wall Street values on the financial chaos. Some tricks of Wall Street players can be an important reason that the American workers lost their jobs. In the film, the incorrect economic policies of the politicians and the rich people that have financial power are criticized. A systematic corruption in the United States of America, which involves a dozen rich people, some high-level politicians, etc. concluded with worldwide financial chaos. There is another factor of the financial collapse: banking. The liberalization in the banking sector provided some possibilities to the major banks to have better growth by purchasing the smaller banks. The effect of the major banks accelerated the collapse process. There are many documentaries about that financial chaos. However, as a film, Inside Job is well directed on explaining the feedbacks of the crisis in 2008.

The quality of earning of a company is related to its net incomes, which are separated from all anomalies. In other words, "Quality of earnings is the percentage of income that is due to higher sales or lower costs.” (Tuovila, 2019, para.6) There are the accounting principles shortly named GAAP, which is a standard way for the companies to stick to have a higher quality of earnings. The essential qualities of the standards are reliability and relevance. Earning management can be defined as the management of achieving predictable financial results. Investigating the absence in the dispersal of earnings, focusing on the specific increases, studying the total increases, and calculating expected and unexpected increases may be the alternative ways of earning management. The earning management may decrease the quality of accounting information.

Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit (AICPA 2002) includes three conditions, which are seen as risk factors of fraud. These are incentives/pressures, opportunities, and attitudes/rationalizations. It is mentioned that in order to claim a risk factor, all three of the conditions should be observed. However, in some instances, incentives/pressures may be the only risk factor of financial statements without the other two conditions. In this case, we can see that the fraud risk factor present in the ratio of WDI's 1999 depreciation expense to total revenues was about 8 percent, where this ratio is normally between 10 and 14 percent in the disposal industry.

When we look at the SECs Staff Accounting Bulletin No. 99, Materiality, it takes the mean that “deviation from the Generally Accepted Accounting Principles (GAAP) is immaterial and that counting is permissible.”(Katz, 1999, para.1) In the example of WDI' misstatements, we may say that, for instance, if there is a %4 overstatement, which is below the numerical threshold (5%), the misstatements can be considered as immaterial. The auditor's liability for detecting earning manipulations in the case is controlling overall management reports by taking into account of the incomes and the expenses of WDI. Fraudulent financial reporting is purposely made by the managers of the company in order to deceive the people that look for information about their business. However, earning management is the correct reporting of all incomes, expenses, and other stuff.

When we look at SEC Rule on Auditor Independence and Rule 101 of the AICPA, we can easily notice that the Peterson accounting firm is not independent in appearance. For, in Rule 101 of the AICPA, it is mentioned that during a Professional engagement, if an employee of the counting firm is a director, officer, etc. in the client firm, we cannot claim independence there. When we look at the case, we observe the example of Jane Sweeny, who is an audit director in WDI and joined the Peterson in 1999. The SEC rules also support the same example in a different way that Richard Agassi, the CEO of WDI, signed some contracts for the special Works.

Conclusion

In conclusion, it is seen that the companies which have a great market share are more likely to increase their assets by corruption. This corruption type differs from companies' greatness. Some of them do this by purchasing smaller competitors; some of them do this by cooperating with the politicians. All types of corruption drag the finance sector to collapse because there is a financial war between the companies. The earning managements of the firms could not be procured well enough, and that pushes them to use some fraudulent financial rapports to save their quality in the stock market.

References

AICPA Code of Professional Conduct. (n.d.). AICPA.org

Beneish, M. D. (2001). Earnings Management: A Perspective. SSRN Electronic Journal.

SEC Staff Accounting Bulletin: No. 99 – Materiality. (n.d.).

Statement of Financial Accounting Concepts No. 2. (n.d.).

Tuovila, A. (2020, February 5). Quality Of Earnings Definition. Investopedia.com

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