Before studying Accounting in Context I believed that the accounting profit figure may not always be a measure of the true profit figure I still support this statement that I made in Part 1 of the assignment however it is for more advanced reasons After studying the module my views had been challenged and ideas about whether true profit really exists have changed and been developed In Part 1 I wrote about how accounting profit may not always be the same as true profit because of the estimates used in preparing accounts through the use of accruals and prepayments Sivakumar 2017 I learnt about the International Accounting Standards Board IASB in Accounting in Context and about the standards in detail in Financial Reporting 1 such as IAS 1 Presentation of Financial Statements It was then I understood why accruals and prepayments were necessary These estimates ensure that there is good information about the financial health of the company For example an invoice in 2018 for the year 2017 should be accrued for its financial year so that the company presents its financial statements for that year Harvard Business Review 2009
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Once we have prepared all accruals and prepayments only then can we be sure to get the accounting profit figure Positive Accounting Theory is concerned with predicting such actions as the choices of accounting policies by firm managers and how managers will respond to proposed new accounting standards Millo 2017 Watts and Zimmerman s theory suggests that all individuals actions are derived by self interest and that individuals will always act in an opportunistic manner that will increase their wealth The concept of morals is not incorporated into the theory The International Accounting Standards Board IASB has a mission to develop IFRS Standards that aim to bring transparency accountability and efficiency to all financial markets around the world IFRS 2017 The IFRS Standards are mandated by law in 116 jurisdictions while 12 more permit the use of IFRS for registrants on regulated markets However not every company abides by these standards Some organisations may prefer to comply with alternative accounting standards so that their financial statements look as healthy as possible In 1988 Hines said that we recognise revenue when it is realised and by naming it revenue it becomes revenue just like black holes
Concepts such as revenue and profit are the creation of accountants what they are depend on how we define them As a result revenue may be recognised differently between accountants as standards may not be identical This is likely to lead to a disparity between the accounting profit figure and the true profit figure This is such in the case of Anglo Swedish drug company AstraZeneca who reported a profit of 9 521 million under UK accounting rules and 29 707 million under US accounting rules Deegan and Unerman 2011 The US and the UK are two countries that have the highest levels of professionalism in the world so the concept of true and fair mirrors on the judgements of the accountants as a liberal professional Providing services in a skilled manner used to be the aim of US audit firms Wyatt 2004 On the contrary firms in the 1960s began to focus on generating as high a revenue as possible because maximising profit has become part of the culture The Enron scandal is an example of this judgements permit creative accounting and this misrepresents the purpose of accounting and results in a lowering in the public's confidence on the integrity of the accounting profession As a result of the Enron scandal the Sarbanes Oxley legislation which helps to prevent the public from fraudulent accounting activities was introduced in 2002 No matter the level of professionalism of the UK and the US there will always be differences in the regulations in both countries However Hoogervorst and Prada 2017 Chairmen of the IASB and IFRS Foundation say that perfect objectivity is aspirational and hence impossible to attain
Therefore we will see differences in the financial statements of companies depending on the standards used It was argued that under UK accounting regulations these liabilities would not have been treated as off balance sheet thus potentially producing significant differences between Enron s balance sheet under UK and US accounting practices Deegan and Unerman 2011 From this it is clear that countries societies and organisations should all adopt the same standards and regulations when preparing accounts and financial information so that all information follows the same guidelines and therefore ends up with the same figures so matter the accountant that produces the accounts This is when the accounting profit figure will be a measure of the true profit In conclusion the true profit of an organisation is obtained when every accountant in all countries in the world can produce accounts of a firm and end up with the same profit figure This is when we have true profit Therefore the question to ask is what can we do to make sure all standards and regulations in every country regarding the accounting are the same The IFRS Standards where standards are currently required are in over 150 jurisdictions IFRS 2017 and the IFRS and IOSCO have a common interest that IFRS Standards should be consistently applied in practice across varying national contexts and settings IFRS 2017 However the term truth is an abstract term The truth is constructed rather than being seen Hines 1998 Therefore truth varies differently depending on the individual The accounting profit figure may be a measure of true profit to a certain extent However the figures are vastly affected by the judgement and subjectivity of accountants with contrasting aims thereby altering the true profit It is also affected by factors such as cultures and regulations in the country
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