Basic Financial Accounting & Reporting Accounting and Its Environment Learning Objectives: After studying this chapter, you should be able to: 1. Define accounting and explain its role in business. 2. Have a fair knowledge. of the evolution of accounting and find how it affected accounting pedagogy, policy and practice. 3. Discuss the basics of ASEAN and recognize how it will affect accountancy practice in the region. 4. Describe the fundamental business model and find how it is applied to the various types of businesses. 5. Distinguish between the different forms and activities of business organizations. Explain the importance of the purpose and phases of accounting. Ascertain the need to adapt Fra Luca Pacioli's system for the modern times. Explain the fundamental accounting concepts and principles. Summarize the salient features of the Accountancy Act of 2004, the Core Competencies. Framework and the Code of Ethics for Professional Accountants and harness them to attain professional advancement. 10. Explain why ethics are crucial in accounting. 11. Identify and discuss the career opportunities open to accountants. San Dennis Rodman, 56-years old this year, is-born in Dallas, USA and deserted by his father (who is incidentally residing here in the Philippines) at age three. His mother, Shirley, raised Rodman in a housing project. At 20, he was working as a:janitor at the Dallas Airport for $5.0 an hour, but a year later he was arrested there for stealing fifty watches; the charges were dropped when the authorities were able to recover the 80ods. Rodman had given them to friends. Then, when he was 21, a local junior college basketball scout suggested that Rodman, who had grown a good half-foot since high school, to try basketball. He tried and failed at first try but on second try at Southeastern Oklahoma State, he made All-American2_| Basic Financial Accounting and Reporting by Prof. WIN Ballada and the grades required to stay in school. Rodman was 25—ancit lent fe — he finally landed in the National Basketball Association (NBA). maeicon eaten Though Rodman proved his talent as a pivotal member of i . e . the two-ti i Detroit Pistons, it took him a long time to catch up in the salary game. es aoe one of the league’s best rebounders, grabbing an average of 15 boards a game, but until 1997, he never eérned more than $2.5 million in a single year. : During the 1995 playoffs, on a day off (at that time he’s playing for the San Antonio Spurs), Rodman was sitting in his kitchen pondering his financial woes with Manley. Manley is his best friend and agent. His $3,800 Ferrari payment was more than a week late. A $9,000 alimony check to ex-wife Annie was looming. And to make matters worse, a half-million dollars he’d borrowed from the Pistons to buy his first house years earlier had gone unpaid for five years now, had ballooned to $745,000 including interest. There are still other dues. All told, Rodman was close to $1.0 million in debt. Turning to his friend, he said plainly, “I need you to make me some money, Bro.” Manley’s first move was.to line up Rodman in autograph sessions for $50 per signature. He negotiated with Rodman’s creditors, telling them if they wanted to get paid in full they'd have to wait awhile, and if they wanted cash today, they could take a discount. And he put together a seven-figure deal to publish Rodman’s autobiography, Bad As | Wanna Be (Delacorte, 1996), which became an instant bestseller. Rodman agreed to be placed by Manley on $1,000 weekly allowance. He exchanged his American Express card for a debit card. In the midst of Rodman’s financial makeover, another lucky break: Rodman was traded to the Chicago Bulls. At first, he was not up to the idea. But Manley convinced Rodman that playing with Michael Jordan and Scottie Pippen was the best conceivable way to boost his marketing muscle. By the end of the 1996 NBA season, Rodman had $1.0 million in the bank, a chunk of it from the $150,000 bonus he earned for helping the Bulls make their way to the NBA Championship. He was on track to hit $2.0 million by the end of the year. Plus, he now has a sizeable investment portfolio (in mutual funds, tech stocks, a controlling interest in a $10 million in sales excavation company). He made a killing in Oakley—maker of the sunglasses he wears “every damn day.” In 1997, according to the Chicago press, Rodman signed an $8.0 million deal with the Bulls. He has endorsement deals with Kodak, Converse and Car'’s Jr. among others. He did a movie with Jean Claude Van Damme. He has two more books in production and more scripts than he can count. Appearances in MTV and in wrestling. Romantic episodes with Madonna, Carmen Electra and other celebrities. Rodman, who spends $100 to change his hair from blue to orange to white to whatever, is now out of the NBA because of his eccentricities nonetheless he’s come very far. He is in the news latelY because of charges related to child-support. Adapted with editorials from the book—The Rich and Famous Money Book, By Chatzky and other relevant articles.Accounting and Its Environment _| 3 What role does accounting play in the life of Dennis Rodman? Rodman, through the efforts of Manley, used accounting information in one form or another. His manager utilized “budgeting” to help Rodman with his finances. Manley tapped his financial sense in coming out with the idea of “wait awhile to be paid in full or cash today but ata discount.” He certainly did a lot of financial analysis when he positioned Rodman in strategic investments and endorsement deals. Manley needed and relied on accounting information to guide him in his dealings for Rodman, It is his single most important business tool in steering his client, Rodman, from the brink of bankruptcy to possible financial prosperity. INTRODUCTION Accounting has evolved, as in the case of medicine and law, in response to the social and economic needs of society. As business and society become more complex, accounting develops new concepts and techniques to meet the ever-increasing needs for financial information. Without such information, many complex economic developments and social programs may never have been undertaken. In a market economy, information helps decision-makers make informed choices regarding the allocation of scarce resources under their control. When decision-makers are able to make well-informed decisions, resources are allocated in a way that better meets the needs and goals of those within the market. Accounting is relevant in all walks of life, and it is absolutely essential in the world of business. Accounting is the system that measures business activities, processes that information into reports and communicates the results to decision-makers. Accounting quantifies business communication. For this reason, accounting is called the Janguage of business. The task of learning accounting is very similar to the task of learning a new language; thus, the need for this book which teaches the Basics of Accounting in a very conceptual manner. ‘ No business could operate very long without knowing how much it was earning and how much it was spending. Accounting provides the business with these information and More. So, accountants can be called the scorekeepers of business. Without accounting, a business couldn’t function optimally; it wouldn’t know where it_stands financially, whether it’s making a profit or not, and it wouldn’t know its financial situation. Also, a Sound understanding of this language will bring about a better management of the financial aspects of living. Personal financial planning, education expenses, car amortization, business loans, income taxes and investments are based on the information system that we call accounting.WIN Ballada 4 | Basic Financial Accounting and Reporting by Pre DEFINITIONS OF ACCOUNTING Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions (Statement of Financial Accounting Standards No. 1, “Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises” (Manila: Accounting Standards Council, 1983), par. 1). ng is an information system that measures, processes and communicates ial information about an economic entity (Statement of Financial Accounting Concepts No. 1, “Objectives of Financial Reporting by Business Enterprises” (Norwalk, Conn.: Financial » Accounting Standards Board, 1978), par. 9). Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information (American Accounting Association, “A Statement of Basic Accounting Theory” (Evanston, Wh: American Accounting Association, 1966), par. 1; Accounting Principles Board, Statement No. 4, “Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises” (New York: AICPA, 1970), par. 40). classifying and summarizing in a significant manner Accounting is the art of recording, in part at least, of a financial and in terms of money, transactions and events which are, character, and interpreting the results thereof (American Institute of Certified Public Accountants, “Review and Resume”, Accounting Terminology Bulletin No. 1 (New York: AICPA, 1953), par. 9). EVOLUTION OF ACCOUNTING ‘Accounting history is important to accounting pedagogy, policy and practice. It makes it possible to better understand our present and to forecast our future. Accounting history is the “study of the evolution in accounting thought, practices and institutions in response to changes in the environment and societal needs. It also considers the effect that this evolution has worked on the environment.”” Primitive Accounting People have counted and kept records throughout history. The origin of keeping accounts has been traced as far back as 8500 B.C., the date archaeologists have established for certain clay tokens—cones, disks, spheres and pellets—found in Mesopotamia (modern Iraq). These tokens represented such commodities as sheep, jugs of oil, bread or clothing and were used in the Middle East to keep records, The tokens were often sealed in clay balls, called bullae, which were 1 Committee on Accounting History, Report of the Committee, Accounting Review, supplement to Vol. XLV, 1920, p. 53.Accounting and Its Environment |_5 broken on delivery so the shipment could be checked against the invoice; bullae, in effect, were the first bills of lading. Later, symbols impressed on wet clay tablets replaced the tokens. Some experts consider this stage of record keeping the beginning of the art of writing, which spread rapidly along the trade routes and took hold throughout the known civilized world. Account records date back to the ancient civilizations of China, Babylonia, Greece and Egypt. People in these civilizations maintained various types of records of business activities. During the 1° dynasty of Babylonia (2286-2242 B.C.), its law which was based on the Code of Hammurabi, requires merchants trading goods to give buyers a sealed memorandum containing the agreed price before it can be considered enforceable. The agreed-upon transaction was recorded by the Scribe (the predecessor of the modern accountant) on a small mound of clay with the. parties affixing “their signatures” on it. This clay was allowed to dry and served as the record of the transaction. For the more important ones, the record can be kiln- dried. At around 3600 B.C. in Babylonia, clay tablets also recorded payments of wages. The rulers of these civilizations used accounting to keep track of the costs of labor and materials used in building structures as in the case of the pharaohs of Egypt in building their great pyramids. Accounting is one of our oldest skills. The earliest collections of understandable writing track how many bushels of grain came into the king’s warehouse. Tablets recorded who brought in the grain and how much the king took as his share. Even in the early days, tax collecting is an activity closely linked to accounting. The presence of bookkeeping in the ancient world has been attributed to various factors including (i) the invention of writing; (ii) the introduction of Arabic numerals; (iii) the decimal system; (iv) the diffusion of knowledge of algebra; (v) the presence of inexpensive writing materials; (vi) the rise of literacy; and (vii) the existence of a standard medium of exchange. A. C. Littleton in Accounting Evolution to 1900 lists seven preconditions for the emergence of systematic bookkeeping: The Art of Writing, since bookkeeping is first of all a record; Arithmetic, since the mechanical aspect of bookkeeping consists of a sequence of simple computations; Private Property, since bookkeeping is concerned only with recording the facts about property and property rights; Money (i.e., among economy), since bookkeeping is unnecessary except as it reduces all transactions in properties or Property. rights to this common denominator; Credit (i.e. uncompleted transactions), since there would be little impulse to make any record whatever if all exchanges were completed on spot; Commerce, since a merely local trade would never have created enough pressure (volume of business) to stimulate men to coordinate diverse ideas into a system; Capital, since without capital commerce would be trivial and credit would be inconceivable.6 | Basic Financial Accounting and Reporting by Prof. WIN Ballado Middle Ages ‘As a result of the Crusades from the 11" to the 13" centuries, Northern Italy's literacy has become widespread. Arabic numerals were also being used as a result of trade with the Near East allowing columns of numbers to be added and subtracted. The use of credit was prevalent and a semblance of an international banking system was also functioning. The Inca Empire, which spanned the west coast of South America throughout the 11" to 14" centuries, used knotted cords of different lengths and colors called quipu to keep accounting records. Development of more formal account-keeping methods is attributed to the merchants and bankers of Florence, Venice and Genoa during the 13" to 15" centuries. Double-entry bookkeeping is not a discovery of science; it is the outcome of continued efforts to meet the changing necessities of trade.’ German philosopher Oswald Spengler wrote in The Decline of the West (1928) that the invention of double-entry bookkeeping was the decisive event in European economic history. The Florentine Approach. Renaissance Florentine markets were a fascinating combination of formalization, in the form of account books and double-entry bookkeeping, and of informal social networks, constructed out of the surrounding rules of Florentine sociality. To them, doing business and living life were extensions of each other. Business was conducted on logic of friendship, but friendship in turn was instrumental, as well as emotional. Account books were not inconsistent with social exchange; rather, they formalized and made social exchange easier. The explosion of commercial credit, at that time, required a system of recording. The earliest evidence of business bookkeeping in Florence, France was evidenced by the bank ledger fragments of 1211 (transcribed in 1887 by Pietro Santini) and with the development of accounting in Tuscany, Italy during the 13th century, as evidenced in the account-books or extracts. But, these were within the framework of the “narrative” or “paragraph” type of accounting record (a sezioni sovrapposte), perhaps derived from the “charge and discharge” format used in public accounts. The system was primitive; accounts were not related in any special way (in terms of equality for entries), and balancing of the accounts was lacking. The emergence of double entry itself, was first witnessed in the “ledgers” of Renieri (or Rinieri) Fini & Brothers (1296-1305] i i iam ( ) and Giovanni Farolfi & Company (1299- Giovanno Farolfi & Company, as appears from the “led; I, “ledger”, was a fin it merchants whose head office was at Nimes in Languedoc Eanes The ledger, however, relates exclusivel ; , 7 ly to the branch at Salon, a i : ha te independent county of Provence. Amatino Manucci was a partner itera a Farolfi & Company, a merchant partnership based in Florence. ae in the kingdom of France.Accounting and its Environment | 7 a RT RSS Ren Financial records that he kept for the firm’s branch in Salon, Provence, survive from 1299-1300. Although these records are incomplete, they show enough detail to be identified as double-entry bookkeeping. These details include the use of debits and credits and duality of entries. They are the oldest known existing examples of the double-entry system. Amatino Manucci was the inventor of double-entry bookkeeping. He managed to construct a comprehensive and fully-articulated set of double-entry records, with a regular balancing procedure on closure of the General Ledger. He used five books—general ledger, two merchandise ledgers, expenses ledger, and cash book (with the white ledger as a sixth)—constituted what looks very like a true double-entry system. In addition, there were at least two subsidiary books. He gave importance to the aspect of financial control. The books were logically subdivided, with segregation of cash and goods accounts from the main ledger, a perpetual inventory of each line of agricultural produce and each grade of cloth or yarn dealt in, and full records of debtors and creditors, expenses, profits, interest and partners’ drawings, as well as the state of account with the head office at Nimes, and an estimate (15% per annum) of the expected rate of return on capital employed? The Method of Venice Luca Pacioli, a Franciscan friar and a celebrated mathematician, is generally associated with the introduction of double-entry bookkeeping. In 1494 he published his book, Summa de Arithmetica, Geometria, Proportioni et Proportionalita or “Everything about Arithmetic, Geometry, Proportions and Proportionality,” which includes, Particularis de Compiutis et Scripturis or “Details of Calculation and Recording," describing double-entry bookkeeping. His treatise reflected the practices of Venice at the time, which became known as the Method ‘of Venice or the Italian method. Therefore, he did not invent double-entry bookkeeping, but rather described what were prevalent accounting practices of the day. Although Pacioli made no claim to developing the art of bookkeeping, he has been regarded as the father of double-entry accounting. He stated that the purpase of bi “to give the trader without delay information as to his assets and eee also advised the computation of a periodic profit and the closing of the books. He said, “It is always good to close the books each year, especially eaepgpeoarsnshinon ‘others. Frequent accounting makes for long 2 G.A. Lee (1977), “The Coming of Age of Double Entry: The Giovanni Farolfi Ledger of 1299-1300", Accounting Historians Journal, 4{2): 79-95.8 | Basic Financial Accounting and Reporting by Prof. WIN Ballada This Italian bookkeeping prospered with the development of the commercial republics of Italy and the use of the double-entry method in the fourteenth century, Goethe, the famous German poet and dramatist, referred to double-entry bookkeeping as “one of the finest discoveries of human intellect.” Werner Sombart, an eminent economist-sociologist, believed that “double-entry bookkeeping is born of the same spirit as the system of Galileo and Newton.” Savary and Napoleonic Commercial Code The earliest systematized form of accounting regulation developed in continental Europe, starting in France in 1673. The government introduced the submission of an annual fair value statement of financial position to protect the economy from bankruptcies. This legal requirement for businesses to keep accounting records was first introduced in the Ordonnance de Commerce of 1673 which was put through by Jean-Baptiste Colbert during the reign of Louis XIV, and the Napoleonic Commercial Code of 1807, that influenced the bookkeeping provisions of commercial law throughout Continental Europe, Francophone Africa, and beyond. The Napoleonic Code or Code Napoléon is the French civil code, established under Napoléon Bonaparte on March 21, 1804. The Commercial Code was adopted in 1807. Jacques Savary, the elder (1622-1690) in an early accounting text stated, “If this merchandise is starting to deteriorate, or go out of style, or is that which one judges he could find at the factory or wholesalers at 5% less, it must be reduced to this price.” Although this is the oldest known formulation of the lower-of-cost-or- market principle, Vance? reported that several earlier accounting texts recommended current cost rather than historical cost valuation of inventory in specific examples where the market valuation was lower. Inventory valuation at the lower-of-cost-or-market was required by the Code of Commerce in France in 1673¢, in Prussia in 1794 (Vance, 1943), and in the German Commercial Code of 1884 (Schmalenbach, 1959, p. 17). As Savary was the principal author, the French Commercial Code of 1673 was also called the Code Savary. In the 17" century, Nicolas Petri was the first person to group similar transactions in a separate record and enter the monthly totals in the journal, rather than recording all transactions seriatim, that is, in a series. In 1769, Benjamin Workman published The American Accountant, the earliest- known American accounting textbook. ? Vance, L., 1943. The authority of history in inventory valuation. The Accounting Review 18 (3), 219-27. “ Littleton, A. C., 1941. A genealogy for “cost or market.” The Accounting Review 16 (2), 161-67.‘Accounting and Its Environment _| 9 Industrial Revolution, Corporate Organization, Railroads, United States Steel ‘Accounting practice really dates from antiquity but the fotmation of an accounting profession was closely tied to the rise of a modern industrial society in Britain during the late 18" century. The need for accounting services emerged slowly, but by the “early decades of the 19" century a flurry of textbooks and handbooks on accounting had appeared, reflecting the impact of the Industrial Revolution. This revolution, which occurred in England from the mid-18" to the mid-19" century, changed the method of producing commercial goods from the handicraft method to the factory system. With this change came the problem of costing for a large volume of products. The specialized field of cost accounting emerged to meet this need for the analysis of various costs. The expanded business operations initiated by the Industrial Revolution required increasingly large amount of funds to build factories and purchase machinery. This need resulted to the development of the corporate form of organization. The growth of corporations spurred the development of accounting. Corporate owners, the shareholders, were no longer the managers of their business. Managers had to create accounting systems to report to the owners the results of their stewardship of the business. This situation created a need for an independent report to provide assurance that management's financial representations are reliable. Accountancy was still an indeterminate calling in Britain as late as the 1830s. Men then engaged in accounting not only made simple accounts but also found it financially necessary to act as auctioneers, appraisers, agents and debt collectors. The profession was shaped by legislation. Accountancy reached the shores of the United States of America as a natural result of the investments being made by British businessmen into the land of opportunities. Railroads, heavy users of debt financing in the late 1800s, were the first American firms to issue balance sheets to absentee creditors. By 1880, the US railroad system had accumulated $4.6 billion of investments which was roughly equivalent to 40% of the American economy’s annual output. Depreciation was formally considered given that the railroad companies used higher value and longer-lived equipment— locomotives, rail cars and track—than previous established enterprises. With the hauling of freight, the equipment gradually lost productive capacity and needed to be replaced. This lost presented a financial reporting problem since it was never clear when the wear and tear took place. Also, there’s the problem of matching of revenues and expenses. The concept of depreciation was largely ignored until the 1909 US corporate income tax law permitted a deduction for depreciation charges in the calculation of taxable income. At the beginning of the 20% century, some managers began to use depreciation to smooth reported earnings. A 1912 Journal of Accountancy editorial complained that that depreciation had become a tool used by management to counter fluctuations in profits. In good years, heavy depreciation charges were made, Bad years saw no provision or an inadequate charge.10 | _Basic Financial Accounting and Reporting by Prof. WIN Ballada On Mar. 12, 1903, United States Stee! published consolidated finan statements as of Dec. 31, 1902, together with Price Waterhouse & Company’s (PW) assurance that they were audited and found correct. US Steel resulted from the amalgamation of various steel producers at that time. It’s the first billion-dollar corporation. tt controlled 75% of the US steel business. There existed complex relationships between US Steel and its many subsidiaries such that PW Managing Partner Arthur Lowes Dickinson believed that the stockholders could be informed adequately of the entity’s relative financial condition only through a consolidation of accounts. US Steel’s consolidated financial statements rapidly became a landmark in accounting history. The era of modern financial accounting had dawned. Scientific American wrote that it was “the most complete and circumstantial report ever issued by any great American corporation,” noting that the company’s total assets of over $1.50 billion dwarfed the $50 million appropriated by Congress for the Spanish-American War several years earlier. ‘Schmalenbach and The Model Chart of Accounts. Eugen Schmalenbach (1873-1955) was a German academic and economist. He was born in Halver, and attended the Leipzig College of Commerce starting in 1898. Schmalenbach was a professor at the University of Cologne and as a contributor to German language journals on the subjects of economics, business management and financial accounting. In the early 1920s, Professor Schmalenbach was frustrated repeatedly with his failure to compare meaningfully the financial data made available by different companies. This led to a research on the problem and the publication of his book, The Model Chart of Accounts. With this book, he- laid the foundation for all subsequent developments in uniform accounting in Germany. It also became the basis for corresponding efforts in other European countries. Schmalenbach claimed that important information could be gained from a firm's accounts. The results of one’s firm should show through-flows more usefully than balances. What he termed "Dynamic Balances" were to be promptly and regularly prepared and presented, so that external changes and internal efficiencies could be gauged. Inter-firm comparisons were also to be facilitated. Imposition of Income Tax and Conflicts with Financial Accounting In the year 10 CE, Xin Dynasty’s Emperor Wang Mang instituted an unprecedented tax—the income tax—at the “rate of 10% of profits, for professionals and skilled labor.” To pay for weapons and equipment in preparation for the Napoleonic wars, William Pitt the Younger of Britain levied an income tax in his budget of December 1798. The 1862 Union Government established the Bureau of Internal Revenue to assess personal and corporate income taxes to help finance the Civil War. In 1943, the US Congress passed income tax withholding as the only way to collect on high tax ratesAccounting and Its Environment | 11 to fund World War II. The Philippines’ Bureau of Internal Revenue (BIR) was created through the passage of Reorganization Act No. 1189 dated July 2, 1904. On August 1, 1904, the BIR was formally organized and made operational under the Secretary of Finance. Financial accounting is conservative and it’s about matching efforts and results. Tax accounting, in turn, is about improving the amount and timing of collections. Note that “taxes are the lifeblood of the government and their prompt and certain availability are an imperious need (Commissioner vs. Pineda, 21 SCRA 105).” This difference in perspective produces conflicts. Note that all returns required to be filed by the Tax Code shall be prepared always in conformity with the provisions of the Tax Code. In case of conflicts with generally accepted accounting principles (GAAP), in the final reckoning, the Tax Code will prevail. Information Age Dan Brinklin and Bob Frankston wrote VisiCalc for the Apple Il, the first electronic spreadsheet, the most important business application for the personal computer. Tremendous advances in information technology have further revolutionized accounting in recent years. Tasks those are time-consuming when done manually can now be done with speed, consistency, precision and reliability by computers. There is an abundance of accounting applications and modules to suite the businesses’ various needs. With-the proliferation of netbooks and smartphones along with its mind-boggling array of applications, surely, doing business will change. This will necessarily bring changes to the field of accounting. As they say, information technology is it, you either breathe it or perish. ASEAN 2015 Establishment and Member States The Association of Southeast Asian Nations, or ASEAN, was established on Aug..8, 1967 in Bangkok, Thailand, ‘with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of ASEAN, namely: Indonesia, Malaysia, Philippines, Singapore and Thailand. ‘Brunei Darussalam then joined on Jan. 7,°1984, Viet Nam on July 28, 1995, Lao PDR and Myanmar on July 23, 1997 and Cambodia on April 30, 1999, making Up what is today the ten Member States of ASEAN. Vision What is ASEAN 2015? In a nutshell, the Vision: “a stable, prosperous and highly competitive ASEAN Economic Region in which there is a free flow of goods, services, investment and a freer flow of capital, equitable economic development and reduced Poverty and socio-economic disparities."12 | Basic Financial Accounting and Reporting by Prof. WIN. Ballada Opportunities: What are the opportunitie: million, ASEAN is characterized by risi gross domestic product (GDP) at current at current prices of US$3,839 and GDP growt! CARP - generally accepted accounting principles Accounting practices follow certain guidelines. GAAP, which stands for generally accepted accounting principles, encompass the conventions, rules and procedures Necessary to define accepted accounting practice at a particular time. Accounting principles are established by humans, Unlike the principles of physics, chemistry, and the other natural sciences, accounting principles were not deduced from basic axioms, nor can they be verified by observation and experiment. Instead, they have evolved. This evolutionary process is going on constantly; accounting principles are not eternal truths. The general acceptance of an accounting principle usually depends on how well it meets three criteria: relevance, objectivity and feasibility.22 | Basic Financial Accounting and Reporting by Prof. WIN Ballada A principle has relevance to the extent that it results in information that is meaningfy, and useful to those who need to know something about a certain organization. A principle has objectivity to the extent that the resulting information is not influenceg by the personal bias or judgment of those who furnish it. Objectivity connotes reliability and trustworthiness. It also connotes verifiability, which means that there is some way of finding out whether the information is correct. A principle has feasibility to the extent that it can be implemented without undue complexity or cost. These criteria often conflict with one another. In some cases, the most relevant solution may be the least objective and the least feasible. [BASIC PRINCIPLES In order to generate information that is useful to the users of financial statements, accountants rely upon the following principles: Objectivity Principle. Accounting records and statements are based on the most reliable data available so that they will be as accurate and as useful as possible. Reliable data are verifiable when they can be confirmed by independent observers. Ideally, accounting records are based on information that flows from activities documented by objective evidence. Without this principle, accounting records would be based on whims and opinions and is therefore subject to disputes. Historical Cost, This principle states that acquired assets should be recorded at their actual cost and not at what management thinks they are worth as at reporting date. Revenue Recognition Principle. Revenue is to be recognized in the accounting period when goods are delivered or services are rendered or performed. Expense Recognition Principle. Expenses should be recognized in the accounting period in which goods and services are used up to produce revenue and not when the entity pays for those goods and services. Adequate Disclosure. Requires that all relevant information that would affect the user's understanding and assessment of the accounting entity be disclosed in the financial statements. Materiality. Financial reporting is only concerned with information that is significant enough to affect evaluations and decisions. Materiality depends on the size and nature of the item judged in the particular circumstances of its omission. In deciding whether an item or an aggregate of items is material, the nature and size of the item are evaluated together. Depending on the circumstances, either the nature or the size of the item could be the determining factor.Accounting and Its Environment | 23 Consistency Principle. The firms should use the same accounting method from period to period to achieve comparability over time within a single enterprise. However, changes are permitted if justifiable and disclosed in the financial statements. : Per revised Philippine Accounting Standards (PAS) No. 1, Presentation of Financial Statements, the presentation and classification of items in the financial statements should be retained from one period to the next unless: * itis apparent, following a significant change in the nature of the entity's operations or a review of its financial statement presentation, that another presentation or classification would be more’ appropriate having regard to the criteria for the selection and application of accounting policies in Philippine Accounting Standards (PAS) No. 8, Accounting Policies, Changes in Accounting Estimates and Errors; o © a Philippine Financial Reporting Standards (PFRS) requires a change in presentation, ACCOUNTANCY IN THE PHILIPPINES Although accounting has been practiced in the Philippines since the Spanish period and possibly even before, the seeds of Philippine accountancy as a recognized profession were planted on March 17, 1928, when Act No. 3105. was approved by the Sixth Legislature. Entitled “An Act Regulating the Practice of Public Accounting; Creating the Board of Accountancy; Providing for Examination, for the Granting of Certificates, and the Registration of Certified Public Accountants; for the Suspension or Revocation of Certificates; and for Other Purposes,” the law paved the way for local accountants to do the work which, up to that time was performed by foreign’accountants in the country. Since then, both the profession and the body that directly regulates it have grown rapidly. From 43 registered accountants in 1923, the number of CPAs has grown to over 100,689 by 1999 and conservatively, at least 160,000-as at today. In May 2015, 2,132 new CPAs were added to the roster. In Oct. 2014, it’s 4,123. In July 2014, it’s 1,107. In Oct. 2013, it’s 4,246. In May 2013, it’s 1,553. In Oct. 2012, it’s 4,772. In May 2012, it’s 1,995. In Oct. 2011, it’s 4,066. In May 2011, it’s 2,130. In 2010, it was 5,859. In 2009, it’s 4,119. In 2008, it’s 3,710; in 2007, 3,705. Many of these professionals have distinguished themselves not only in the field of accountancy itself but in many other areas of human endeavor. To the roster of Philippine CPAs belong such luminaries, past and present: * Don Vicente Fabella, in 1915, became the first Filipino CPA in the United States (passed the Milwaukee, Wisconsin CPA Board Exams), and founder of Jose Rizal University (JRU) in 1919; Dr. Nicanor Reyes, founder and first President of the Far Eastern University (started in 1928 as the Institute of Accountancy, which later became the Institute of Accounts, Business and Finance, and then registered as the Far Eastern University in Jan, 31, 1934 [the official birthday, though, is Nov. 5, 1933]), Mr. FEU died a hero during wwil;24 | Basic Financial Accounting and Reporting by Prof. WIN Ballada = Belen Enrile-Gutierrez, first Filipina CPA and one of the seven original trustees of FEU in 1933; * Jaime Hernandez and Paciano Dizon, the first and second Filipino Auditor Generals of the Commission on Audit; + Manuel Villar, Filipino tycoon, former Speaker of the House of Representatives, Senate President, and 2010 Presidential Candidate of the Nacionalista Party; = Washington SyCip, past president of the International Federation of Accountants, the only Asian who has held the position and Founder and Past Chairman of SGV & Co., the leading accountancy firm in the country; + Jose W. Diokno, former Senator of the Philippines and Secretary of Justice; "= Wenceslao Lagumbay, former Senator of the Philippines; "Alberto Romulo, former Senator of the Philippines, Executive Secretary and Secretary of Foreign Affairs; * Andres Soriano, founder of one of the country’s leading conglomerates; and * Manuel. Morales, was a full-time member of the Monetary Board of the Bangko Sentral ng Pilipinas during the Ramos presidency, had a long career in private banking (41 years), 21 years of which were spent as Board Chair of Manila Banking Corp. and Equitable Bank; a working student in FEU and was the one who decided to award to this humble author a college scholarship (in 1988-1991) under the Go kim Pah Scholarship of Equitable Bank; and many others who have been cabinet members, heads of government, agencies, chairmen and members of corporations and institutions, deans, professors in the academe, and entrepreneurs, Local accounting firms and partnerships have likewise entered the mainstream of international practice, establishing tie-ups with the Big Five of the accounting world, namely, Arthur Andersen (now defunct), PriceWaterhouseCoopers, Ernst & Young, KPMG, and Deloitte Tohmatsu International. The biggest of the local firms, SGV & Co., was the first to offer services outside the country and initiated the establishment of The SGV Group composed of leading national accounting firms in East and Southeast Asia. heads and The increasing complexi Practice of the from three mer six (chairman 1967") in 1967, ("The Revised ‘Accountancy ity of professional regulation and the developments in the Profession have occasioned the expansion of the Board of Accountancy - tmbers (president and two members) under Act No. 3105 in 1923, through 2nd five members) under Republic Act No. 5166 ("The Accountancy Act of * fo seven (chairman and six members) under Presidential Decree No. 692 Reeaneet law’) in 1975, Republic Act No. 9298 (“The Philippine Still provides for the same composition: Under the stewardst hi Accountancy dischan nt the Profes sional Regulation Commission (PRC), the Board of nari ea ene controlling and regulating the a istinction. But over and above its regular inting education, conducting tancy with au functions of standardizing regulating accou:Accounting and Its Environment | 25 examinations for registering CPAs, and maintaining the rules of the practice, the Boer has taken the lead in raising the standards of the profession to a very high level o excellence, as evidenced by the following developments: Full computerization of the CPA licensure examinations. The accounting profession was the first among the professions to achieve this, paving the way for the current record one-day,release of examination results. + Upgrading of the quality of accounting education. With the PRC, the Board made representations with the then DECS for the adoption of standards for the organization and operation of professional accounting programs leading to the prescription of a common baccalaureate degree — Bachelor of Science in Accountancy. The Board periodically reviews school curricula and syllabi to maintain their relevance, particularly in the area of information technology. It also initiated the continued monitoring of schools’ performance in the CPA examinations and the recommendation of corrective measures, as necessary. = Regulation of CPA firms and partnerships. To assure compliance of their staff and partners with standards and regulations of the practice, the Board moved for the registration of firms or partnerships of CPAs with both the PRC and the Board of ‘Accountancy * Requirement of CPAs in civil service. The Board made representations with the Civil Service Commission to require that only CPAs be appointed as accountants and auditors or to hold allied positions in government. In 1975, with the accreditation by the PRC of the Philippine Institute of Certified Public Accountants (PICPA) as the bona fide professional organization representing CPAs in the country, the Board has coordinated with PICPA to further strengthen the profession. With PICPA, it has worked for the passage of The Accountancy Act of 1967; the issuance of the Code of Professional Ethics in 1978; the issuance of guidelines in 1987 for the mandatory continuing professional education (CPE) program for CPAs; the integration of the accounting profession completed in 1987; the biennial oath-taking of new CPAs; standards setting for the profession through membership in the Accounting Standards Council (now FRSC) and the Auditing Standards Practices Council (now AASC); the declaration of the Accountancy Week, the new Code of Ethics (eff. June 30, 2008), and The Accountancy Act of 2004. As the global professional environment unfolds, with the onset of the 21st century, accountancy continues its trailblazing efforts. It is the first among the Philippine Professions to be included under the World Trade Organization’s (WTO) policy of liberalization of services. This means that Philippine accountants will be freely Competing with in the global playing field against accountants from other parts of the World and will be able to hold their own. This is due, in no small measure, to the long and distinguished careers of the country’s accountants, to the linkages that local firms have forged with the world’s biggest accounting firms, and to the integrity with which the Board of Accountancy and the Professional Regulation Commission at «administering a profession that has acquired a global Perspective, Se26 | Basic Financial Accounting and Reporting by Prof. WIN Ballada ACCOUNTANCY ACT OF 2004 Republic Act No. 9298, known as the Philippine Accountancy Act of 2004 was signed in, law by President Gloria Macapagal-Arroyo on May 13, 2004. This law repeatey ‘ Presidential Decree No. 692, the Revised Accountancy Law, which was enacted May « 1975. Some sections of the law are presented as follows: ] Scope of Practice (Sec. 4) The practice of accountancy shall include, but not limited to, the following: Practice of Public Accountancy — shall constitute in a person, be it his/her individual capacity, or as a partner or as a stay member in an accounting or auditing firm, holding out himself/herself as one skilled in the knowledge, science and practice of accounting, and as a qualified person to render professional services as a certified public accountant (CPA); or offering or rendering, or both, to more than one client on a fee basis or otherwise, services such as: = the audit or verification of financial transaction and accounting records; or = the preparation, signing, or certification for clients of reports of audit, balance sheet, and other financial, accounting and related schedules, exhibits, statements or : reports which are to be used for publication or for credit purposes, or to be filed with a court or government agency, or to be used for any other purpose; or = the design, installation, and revision of accounting system; or = the preparation of income tax returns when related to accounting procedures; or * when he/she represents clients before government agencies on tax and other matters related to accounting or renders professional assistance in matters relating to accounting procedures and the recording and presentation of financial facts or data. Practice in Commerce and Industry ~ shall constitute in a person involved in decision making requiring professional knowledge in the science of accounting, or when such employment or position requires that the holder thereof must be a certified public accountant. Practice in Education/Academe ~ shall constitute in a person in an educational institution which involve teaching of accounting: auditing, management advisory services, finance, business law, taxation, and other technical related subjects: Provided, That members of the Integrated Bar of the Philippines may be allow’ to teach business law and taxation subjects. Practice in Government ° — shall constitute in a person who holds, or is appointed to, a position in an accountiné professional group in government or in a government-owned and/or controlled corporation: including those performing proprietary functions, where decision making requires profession®Accounting and Its Environment | 27 knowledge in the science of accounting, or where a civil service eligibility as a certified’ public accountant is a prerequisite. The Professional Regulatory Board of Accountancy and its Composition (Sec. 5) The Professional Regulatory Board of Accountancy, hereinafter referred to as the Board, under the supervision and administrative control of the Professional Regulation Commission, hereinafter referred to as the Commission, shall be composed of a chairman and six (6) members to be appointed by the President of the Philippines from a list of three (3) recommendees for each position and ranked by the Commission, from a list of five (5) nominees for each position submitted by the accredited national professional organization of certified public accountants. The Board shall elect a vice- chairman from among its members for a term of one (1) year. The chairman shall preside in all meetings of the Board and in the event of a vacancy in the office of the chairman; the vice-chairman shall assume such duties and responsibilities until such time as a chairman is appointed. Qualifications of Members of the Professional Regulatory Board (Sec. 6) A member of the Board shall, at the time of his/her appointment, possess the following qualifications: a, Must be a natural-born citizen and a resident of the Philippines; b, Must be a duly registered Certified Public Accountant with at least ten (10) years of work experience in any scope of practice of accountancy; ¢. Must be of good moral character and must not have been convicted of crimes involving moral turpitude; and d. Must not have any pecuniary interest, directly or indirectly, in any school, college, university or institution conferring an academic degree necessary for admission to the practice of accountancy or where review classes in preparation for the licensure examination are being offered or conducted, nor shall-he/she be a member of the faculty or administration thereof at the time of his/her appointment to the Board. €. Must not be a Director or Officer of the Accredited National Professional Organization of Certified Public Accountants (APO) at the time of his appointment. The Certified Public Accountant Examinations (Sec. 13) All applicants for registration for the practice of. accountancy shall be required to undergo a licensure examination to be given by the Board in such places and dates as the Commission may designate subject to compliance with the requirements prescribed by the Commission in accordance with Republic Act No. 8981. Qualifications of Applicants for Examinations (Sec. 14) Any person applying for examination shall establish the following requisites to the Satisfaction of the Board that he/she:28 | Basic Financial Accounting and Reporting by Prof. WIN Ballada is a Filipino citizen; xd moral character; Oo a selec ot the degree of Bachelor of Science in Accountancy conferred by a School, college, academy of institute duly recognized and/or accredited by the Commission on Higher Education (CHED) or other authorized government offices; and : d. has not been convicted of any criminal offense involving moral turpitude. The following documents shall be submitted in support of the above requirements: a. Certificate of Live Birth in National Statistics Office (NSO) security paper; b. Marriage Contract in NSO security paper for married female applicants; College diploma with indication therein of date of graduation and Special Order Number unless it is not required; d. Baccalaureate Transcript of Records with indication therein of date of graduation and Special Order Number unless it is not required; e. | National Bureau of Investigation (NBI) Clearance; f. Other documents that the Board of Accountancy may require. Scope of Examination (Sec. 15) The licensure examination for certified public accountants shall cover, but are not limited to the following subjects: Theory of Accounts, Business Law and Taxation, Management Services, Auditing Theory, Auditing Problems, Practical Accounting Problems | and Practical Accounting Problems II. The Board, subject to the approval of the Commission, may revise or exclude any of the subjects and their syllabi, and add new ones as the need arises. Provided, That the change shall not be more often than every three years. The Board has revised the number of subjects being tested, and they are as follows: Financial Accounting and Reporting, Taxation, Regulatory Framework for Business Transactions, Advanced Financial Accounting and Reporting, Management Advisory Services, and Auditing. Rating in the Licensure Examination (Sec. 16) To be qualified as having passed the licensure examination for accountants, a candidate must obtain a general average of seventy-five percent (75%), with no grades lower than sixty-five percent (65%) in any given subject. In the event a candidate obtains the rating of seventy-five percent (75%) and above in at least a majority of subjects as provided for in this Act, he/she shall receive a conditional credit for the subjects passed: Provided, That a candidate shall take an examination in the remaining subjects within two (2) years from the preceding examination: Provided further, That if the candidate fails t obtain at least a general average of seventy-five percent (75%) and a rating of at least sixty-five percent (65%) in each of the subjects reexamined, he/she shall be consideredAccounting and Its Environment | 29 as failed in the entire examination. Provided, That the Board may adopt its own internal procedures on the implementation of this provision. Report of Ratings (Sec. 17) The Board shall submit to the Commission the ratings obtained by each candidate within ten (10) calendar days after the examination, unless.extended for just cause. Upon the release of the results of the examination, the Commission shall send by mailing the rating received by each examinee at his/her given address using the mailing envelope submitted during the examination. Provided, That the report of rating may be distributed to the successful examinees during the mass oath taking as new registered CPAs. Failing Candidates to Take Refresher Course (Sec. 18) Any candidate who fails in two (2) complete Certified Public Accountant Board Examinations shall be disqualified from taking another set of examinations unless he/she submits evidence to the satisfaction of the Board that he/she enrolled in and completed at least twenty-four (24) units of subject given in the licensure examination. Provided, That such refresher course shall be offered only by an educational institution granting a degree of Bachelor of Science in Accountancy. Provided further, That the candidates shall have the option of taking the aforesaid subjects in the regular course offering or in a special refresher course duly accredited by the Board. For purposes of this Act, the examination in which the candidate was conditioned together with the removal examination on the subject in which he/she failed shall be counted as one complete examination. PROFESSIONAL ORGANIZATION Article IV, Section 30, Republic Act No. 9298, The Philippine Accountancy Act of 2004, provides that “all registered CPAs whose names appear in the roster of CPAs shall be united and integrated through their membership in a one and only registered and accredited national professional organization of registered and licensed CPAs, which shall be registered with the Securities and Exchange Commission as a nonprofit corporation and recognized by the Board of Accountancy subject to the approval of the Professional Regulation Commission.” The Philippine Institute of Certified Public Accountants (PICPA) is the integrated national professional organization of CPAs in the Philippines accredited by the BOA and the PRC per PRC Certificate of Accreditation No. 1-APO-015 dated May 19, 2008. It was founded in 1929. PICPA is a registered non-stock corporation. The objectives of the Institute are as follows:30 | Basic Financi and Reporting by Prof. WIN Ballada * To protect and enhance the credibility of the CPA certificate in the service of the public. + To maintain high standards in accounting education. + To instill ideals of professionalism, ethics and competence among accountants. * To foster unity and harmony among members. PICPA adheres to the highest ideals of professionalism and commitment to service and upholds such values asi integrity, professional excellence, innovation, discipline, teamwork, social responsibility and commitment. Changes are inevitable because of the effects of the Republic Act No. 9298, the Accountancy Act of 2004 and its Implementing Rules and Regulations. The Amended | By-Laws of PICPA (dated Nov. 26, 2005) provides that the PICPA organization shall be composed of four (4) geographical areas covering the entire Philippine archipelago divided into Luzon, Visayas, Mindanao and National Capital Region (Metro Manila), represented by nine (9) regions and four (4) sectors. The nine regions are Metro Manila, Northern Luzon, Central Luzon, Southern Tagalog, Bicol (author's note: this is a new region, per amendment), Eastern Visayas, Western Visayas, Northern Mindanao and Southern Mindanao. The sectors are Education/Academe, Public Practice, Commerce and Industry, and Government. PICPA is be governed by a National Board of Directors, composed of twenty-five (25) national directors, elected from the four (4) geographical areas representing the nine (9) regions and the four (4) sectors of the profession. The total of 25 national directors shall be comprised of: twenty-one (21) regional directors from the geographical areas and four (4) sectoral directors. The amended by-laws provided for a change from calendar year to fiscal year basis starting July 1, 2006. ACCOUNTING STANDARDS IN THE PHILIPPINES Accounting Standards Council On Nov. 18, 1981, the Philippine Institute of Certified Public Accountants (PICPA) created the Accounting Standards Council (ASC) to establish and improve accounting standards that will be generally accepted in the Philippines. The creation of the Council received the support of the following: the Securities and Exchange Commission (SEC) and the Central Bank of the Philippines (CB)—regulatorY agencies where the financial statements are filed; the Professional Regulation Commission (PRC) through the Board of Accountancy—which supervises CPAs and auditors; and the Financial Executives Institute of the Philippines (FINEX)—which is the largest organization of financial executives who are responsible for the preparation of the financial statements. The ASC was composed of eight (8) members—four from PICPA including the designated Chairman; and one each from SEC, CB, PRC and FINEX.Accounting and Its Environment | 31 The standards would generally be based on the following: existing practices in the Philippines; research or studies by the Council; locally or internationally available literature on the topic or subject; and statements, recommendations, studies or standards issued by other standard-setting bodies such as the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). The statements and interpretations issued by the Council represented represent generally accepted accounting principles*in the Philippines. Accounting principles become generally accepted if they have substantial authoritative support from the relevant parties interested in the financial statements—the preparers and users, auditors and regulatory agencies. Financial Reporting Standards Council Per Section 9(A) of the Rules and Regulations Implementing Republic Act No. 9298 otherwise known as the Philippine Accountancy Act of 2004, the Financial Reporting Standards Council (FRSC) shall be the new accounting standard setting body. The FRSC shall be composed of fifteen (15) members with a Chairman, who had been or presently a senior accounting practitioner in any of the scope of accounting practice and fourteen (14) representatives from the following: one each from the BOA, SEC, BSP, BIR, COA and a major organization composed of preparers and users of financial statements; and two representatives each from the accredited national professional organization of CPAs in public practice, commerce and industry, education/academe and government. CORE COMPETENCIES FRAMEWORK FOR ACCOUNTANTS |n recent years, there has been a growing clamor for professional bodies and the academe to bridge the gap between the requirements of the workplace and the academic preparation of our professionals. A competency-based approach to the Preparation of professionals offers a systematic and effective way of bridging this gap. A competency-based approach to education is one where the competencies, and skill Sets required of a newly admitted professional are identified through a formal process and are later validated by business and industry and subject matter experts. Such identified competencies (or learner outcomes) have predetermined performance Measures for assessing skill acquisition. The government has undertaken efforts to improve the entry-level qualification requirements for the Filipino CPAs by releasing the well-defined set of competencies, Core Competency Framework for Entry to the Philippine Accountancy Profession. aa core competencies for accountants identify the knowledge, skill’ and professional values that new CPAs need to have in order to Successfully face the challenges of t day’ changing environment and the future. : ocay.s32 | Basic Financial Accounting and Reporting by Prof. WIN Ballada The strategic goal. is to produce technically competent and ethical professionay accountants ready to compete internationally. Hence, the higher education structure (which includes the curriculum and course syllabi) should develop the following minimum core competencies: Knowledge The CPA’s knowledge must cover: General Knowledge Of emphasis here are gaining an understanding of the different cultures in the world and developing an international perspective. It is generally believed that the traits that will make our Filipino CPAs prominent in the global marketplace are: competency in the English language (the lingua franca of business), adaptability to Western business practices, level of trainability and g00d capabilities in dealing with foreign partners. Organizational and Business Knowledge In addition to the core knowledge in areas such as’economics, quantitative methods and business statistics, organization behavior, marketing and operations management, the CPA must be conversant of international business and have an understanding of how the global business system works. He should also have an appreciation of the importance of ethics and corporate governance in business. The CPA must demonstrate competence in the following: a ©» administrative capability and efficiency * decision modeling risk analysis and management measurement industry and sector perspective Information Technology (IT) Knowledge This includes not only being conversant with IT concepts for business systems but sound knowledge on internal control in computer-based systems, development standards and Practices for business systems, management of the adoption, implementation and use of 'T, evaluation of computer business systems, and managing the security of information, Accounting Knowledge This includes core knowledge related to accounting and related areas and must include proficiency in the international accounting and auditing standards, ; cost management and the latest concepts in management accounting, recent tax laws and business andAccounting and Its Environment | 33 commercial laws. It also includes knowledge of corporate finance and the Philippine capital markets, professional ethics and environmental accounting and reporting. The CPA should demonstrate competence in the following: * Basic Accounting and Preparation of Financial Statements, the Accounting Profession and International Accounting Standards * Advanced Financial Accounting Practices * Advanced Financial Reporting Principles * Management Accounting — Basic Concepts * Management Accounting - Information for Planning, Decision-Making and Control ; Taxation, Business and Commercial Laws i Auditing - Fundamentals ‘Auditing - Advanced Concepts Business Finance and Financial Management SI The skills to be developed include: Intellectual This set of skills includes the ability to carry out abstract logical thinking and understand critical thinking. It also includes creative thinking or the generation of new ideas; visualization or “seeing things in the mind’s eye”; and reasoning skills or the discovery of a rule or principle underlying the relationship between two or more objects and applying it when solving a problem. The CPA rust demonstrate the following skills: © analysis * problem solving * strategic/critical thinking Interpersonal This involves developing the ability of CPAs to work in groups and being a team player. It includes the skills to participate as member of a team and contributing to group effort; teaching others new skills; working to satisfy clients’ expectations; negotiation skills and working with diversity or working well with men and women from diverse backgrounds. The CPA must demonstrate attributes such as: * being a team player persuasion, confidence and diplomacy discreetness, open mind and patience * capability for work and ability to respond well to pressure Communication This refers to active listening skills and the ability to communicate effectively one’s Points of view, both orally and in writing, at all organizational levels; being able to justify34 | Basic Financial Accounting and Reporting by Prof. WIN Ballada ‘one’s position, deliver powerful presentations and to persuade and convince others The CPA must demonstrate skills such as the ability to: © verbally and/or in writing explain _ financial/statistical/administrative matters/policies/procedures/regulatory matters/audit results at a level appropriate to the audience. * ask clear, concise and relevant questions to obtain desired information to perform a task. © negotiate effectively. Values Values must concentrate on: Professional Ethics | Since the objectives of the accountancy profession are to work in accordance with the highest standards of professionalism, to attain the higher level of performance and generally to meet the public interest, the need for CPAs to conform to the ethical standards of the profession become vital. These include integrity, objectivity and independence, professional competence and due care, confidentiality, and professional behavior. Moral Values Beyond ethical rules, there is a need for CPAS to be able to discern between what is morally right or wrong. ROLE OF ETHICS IN BUSINESS Definition Ethics is concerned with right and wrong and how conduct should be judged to be good or bad. It is about how we should live our lives and, in particular, how we should behave towards other people. It is therefore relevant to all forms of human activity. Business ethics tells what is right or wrong in a business situation, while professional ethics tells the same thing regarding a profession. Ethical conflicts can arise, however, when what might be best for the company is wrong morally or professionally. Ethical Dilemma Ethical dilemma, by definition, is a situation in which there is no obvious right or wrong decision but rather a right or right answer. Business is a good source of ethical dilemmas because its primary purpose is to make 4 profit. It is a constant search for potential advantage over others such that business persons are under pressure to do whatever yields such advantage. It is fundamentalAccounting and Its Environment | 35 that ‘business consciously apply ethical rules in its decision process to avoid potentially undesirable situations. Ethics will probably prescribe that child labor is wrong. Yet in some countries, children are put to work at a young age, and often in poor working conditions. The children have no choice and from our point of view, they are basically being exploited. Suppose now that a company purchases well-made, inexpensive products from a foreign company that uses child labor in poor working conditions. The good quality and low price helps the company stay competitive. But is it right to purchase the’ products? This is an ethical dilemma. Suppose the foreign nation does not prohibit child labor, and the other country does not prohibit these imports. It may be legal, but is it right? The child-labor situation has other complexities. Let’s assume that the purchase is wrong because children are being exploited; but, on one hand, the families of these children need their income for food’ and shelter. Is it still wrong? Under the circumstances, perhaps buying those products provides a greater good. ’ Sometimes professional or personal ethics may conflict with business ethics. From the business standpoint, staffs are paid to further their employer’s interests. But the staff also has professional and personal ethics to uphold. Here are some difficult sample situations: * To remain competitive, a company decided to use cheaper lumber in the ladders it sells; although this may, in some instances, cause injury. © Asstaff is asked to take part in a clandestine investigation of the personal life of an employee. ‘© Asuperior directs a subordinate not to hire a qualified individual because he is “not his (superior’s) type”. * Ahuman resource manager must lay off a staff who desperately needs the income and the staff is withoutany good alternative job option. * Having privileged or insider information which can surely help the trusted staff earn a significant amount of money from the stock market. There are no-easy answers to ethical dilemmas, When we are attempting to solve an ethical dilemma, we follow a process of ethical reasoning. We look at the information available to us and draw conclusions based on that information in relation to our own ethical standards. An individual must have a well-developed conscience and must do What the conscience tell is right. Individual factors, organizational relationships and OPPortunity interact to determine ethical decisions in business. In its simplest way, an cthical problem can be solved in three basic steps: analyze the consequences, anal the actions, and make a decision. ve Sometimes when faced with limited information and therefore, alternatives, the “sleep-test ethics” can be help. Badaracco Jr., sleep test is supposed to tell people Morally sound decision. A person who made a ti » without any In Defining Moments, by Joseph whether or not they have made a ight choice can sleep soundly after36 | Basic Financial Accounting and Reporting by Prof. WIN Ballada making the decision. It anchors its belief on the idea that people should rel personal insights, feelings and instincts when faced with a difficult problem ethics of intuition. Some other ethical dilemmas follo' ly On their - It is the * White collar crime is a fact of business life, so be on the lookout for it, Big sums of money are lost annually due to fraud, embezzlement, theft of equipmer nt and supplies, false insurance claims, bribery, kickbacks, and other schemes. Customers, suppliers, shareholders, and everyone else pays a price for this. Activities of this nature should be brought to the attention of the company’s chief of security or legal services. * Whistle-blor ig refers to going to the authorities or the media with proof that a company is engaged in wrong-doing. Some people see whistle-blowers as “squealers,” while others see them as heroes. “Extreme situations call for extreme measures, and whistle-blowing usually serves an important purpose. * Conflicts of interest arise when a person must play two conflicting roles in a situation. For example, if the purchaser of a telecommunications company is part- ‘owner of a company bidding to supply the needs of the telecom firm, then there is a conflict of interest. How can the purchaser be objective regarding who become the supplier when he stands to gain from the decision? When faced should with a conflict of interest situation, it’s best to inform someone responsible about the * situation or to relinquish roles, Another example, if a member or members of a Technical Committee of the Commission on Higher Education (CHED) tasked with revising the curriculum suddenly includes his/her or their self-authored books as suggested refer rences without any legal mandate to do so. Also, if the Chair of a Continuing Professional Education (CPE) Council of a professional organization is also the one giving CPE lectures and receiving compensation/honorarium from them. * Fiduciary respon or executor of an estate have toward a client. In a fiduciary relationshi professional must put the client’s interests ahead of his own because the clie! placed significant trust in him and his professional abilities. ss are typically those that an attorney, CPA, financial advisor, ip, the nt has * Sexual harassment is defined as unwanted repeated or aggressive sexual commentary or advances of a sexual nature toward another person. It is wrong, and it can amount to professional suicide. * Discrimination based on race, religion, ethnicity, gender, age, marital’stati us, or sexual preference is to be avoided on both legal and ethical grounds. Most of us, if we are honest with ourselves, understand that we all have prejudices to some degree. The goal is to be aware of them and not let them affect our behavior or relationships, especially on the job. In fact, many companies are seeing the benefits of developing a diverse staff, if only because the market is becoming more diverse and companies with diverse staffs will be best able to serve these markets.Accounting and Its Environment | 37 Ethical Financial Reporting Ethics is especially important in preparing financial reports because users of these reports must depend on the good faith of the people involved in their preparation. Users have no other assurance that the reports are accurate and fully disclose all relevant facts. Imagine trying to carry on a business or invest money if you could not depend on the individuals you deal with to be honest. . If managers, customers, investors, co-workers, and creditors all consistently lied, effective communication and economic activity would be impossible. Information would have no credibility. Corporate America’s long-buried losses, financial shell games, corrupt practices and secret self-dealings were suddenly exposed in media. Big names like Enron, WorldCom, Tyco, Qwest, Adelphia, Bernard L. Madoff Securities LLC, and others went down one after another. The common reason for these unprecedented business failures was fraudulent financial reporting. The intentional preparation of misleading financial statements is called fraudulent financial reporting. These intentional acts are achieved through the manipulation of records, falsification of transactions or the intentional misapplication of various accounting principles to be able to obtain a loan, to meet earnings projections, or to increase the value of the company. To illustrate the gravity of the problem, in 2002, WorldCom, the second largest long- distance and Internet carrier in the U.S.A. became the subject of a Securities and Exchange Commission (SEC) investigation and it was revealed that WorldCom overstated its earnings by US$3.8 billion. Enron, before its bankruptcy in late 2001, employed around 21,000 people and was one of the world’s leading electricity, ‘natural gas, pulp and paper, and communications companies. It’s the 7 largest company in the United States before the fiasco. It reported revenues of US$111 billion in 2000. Its collapse caused over US$60 billion in stock market losses. In June 2009; Bernard Madoff was sentenced to 150 years in prison for defrauding thousands of investors in one of the biggest frauds, another Ponzi scheme, in American history. The extent of the fraud is estimated at US$50 billion. Committing fraud is certainly an illegal act usually perpetrated by senior management. It shows that the people involved in these acts had failure in character. They created a culture of greed and indifference to the truth. They exhibited a serious lack of ethical awareness and ethical conscience. New laws, regulations and standards were passed to address the problems. Ethics and corporate governance suddenly became the big thing. Business schools immediately faced the challenges squarely by revising and including business ethics and governance in their curriculum. Sarbanes-Oxley Act . In the United States of America, the Sarbanes-Oxley Act (or SOX), signed into law by President George W. Bush on July 30, 2002, is the most far-reaching attempt to protect38 | Basic Financial Accounting and Reporting by Prof. WIN Ballada investors since President Franklin Delano Roosevelt's 1933 Securities Act ices the Great Depression. The law applies to all companies that are required to file Periodic reports with the US SEC. This Act is significant because of its international dimension Around 1,500 non-US companies, including many of the world’s largest, list their shares in the US. SOX is a legislation which resulted from the widespread disillusionment about corporate integrity. Some of the major provisions of SOX designed to restore public confidence are as follows: © The SEC is required to establish a full-time five-member federal oversight board that will police the accounting industry. ‘* Chief executive and financial officers are required to certify periodic financial reports and are subject to criminal penalties for violations of securities reporting requirements. * Accounting firms are prohibited from providing many types of consulting services to. the companies they audit. * Auditors must maintain financial documents and audit work papers for 5 years. * Auditors and accountants can be imprisoned for up to twenty years for destroying financial documents and willful violations of the securities laws. ‘* Apublic corporation must change its lead auditing firm every five years. * There is added protection for whistle-blowers who report violations of the SOX. * SOX shifts responsibility for financial probity and accuracy to the board’s audit committee. It also requires appointment of independent directors, increased financial statement disclosures, an internal code of ethics, among others. Code of Corporate Governance On April 5, 2002, the Securities and Exchange Commission of the Philippines issued Memorandum Circular No. 2 otherwise known as the Code of Corporate Governance. The Code of Ethics for Professional Accountants in the Philippines was recently adopted from the revised Code of Ethics for Professional Accountants developed by International Federation of Accountants (IFAC) and will be effective June 30, 2008. These events usher in a new era in the relationship among business, government, the investing public and other users of financial information. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS IN THE PHILIPPINES The Code of Ethics for Professional Accountants in the Phil by the Board of Directors of the Philippine Institute of Certified Public Accountants (PICPA) and the same has been adopted by the Board of Accountancy (BOA) and finally approved by the Professional Regulation Commission (PRC) as part of the rules and regulations of the BOA for the practice of the accountancy profession. pines have been approved PICPA as a member of the International Federation of Accountants (IFAC) is committed to the IFAC’s broad objective of developing and enhancing a coordinated worldwide