Ethics and Financial Reporting Case Study: NZZ Limited Analysis

This case study examines ethical issues in accounting and financial reporting, focusing on the actions of Juliette, the CFO and executive director of NZZ Limited. The case presents three key issues: the premature recognition of sales revenue, the manipulation of depreciation rates, and the improper capitalization of research and development expenditures. The analysis evaluates these actions against relevant accounting standards, including AASB and FASB, and considers their implications for the audit report. The remuneration structure, which links bonuses to profit growth, is identified as a potential driver of creative accounting practices. The case concludes by highlighting the need for proper justification of transactions and the importance of transparent financial reporting, with recommendations for audit qualifications and improved ethical conduct.

ETHICS IN
ACCOUNTING AND
FINANCIAL REPORTING
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TABLE OF CONTENTS
• INTRODUCTION
• DISCUSSION ON THE CASE STUDY 1
• DISCUSSION ON THE CASE STUDY 2
• DISCUSSION ON THE CASE STUDY 3
• CONCLUSION

INTRODUCTION
• Juilette is the CFO and executive director of listed company named
NZZ.
• Remuneration structure –
 Base Salary: $ 500000
 Bonus: Shares of company based on achievement of specific
performance and growth in profits of company.
• Juilette gives authorization for few transactions during June month in
the current accounting period.
• These transactions are disputed and contradictory and are in
discussion with auditor.

DISCUSSION ON THE CASE STUDY 1
• Background: Sales accounted in June’18, Delivery made in July’18.
• Rules and Standard: As per Para 4, AASB 118, revenue to be
accounted in books on fulfillment of 5 conditions namely:
 Significant risk, reward and ownership transferred
 Revenue reliably measured
 Economic benefits flow to flow to entity
 No managerial involvement in ownership and no control on goods
 Expenses and cost on transaction reliably measured

DISCUSSION ON THE CASE STUDY 1…CONTD…
• Result and recommendation
 If above conditions satisfied, mere delivery in July, then the
accounting is correct.
 If conditions not satisfied, then leads to wrong and creative
accounting.
 Anomaly to be reported in the Audit report as an observation.
 To be reported in Audit report as qualification.

DISCUSSION ON THE CASE STUDY 2
• Background: Depreciation rates decreased for all categories of non
current assets in June’18.
• Rules and Standard:
 Change in rate to be shown as change in accounting estimate
 Change to be made only based on current or future periods
 No adjustment in past year
 Rate to be changed if expected pattern of consumption of
economic benefit changes.
 Necessary disclosures to be made as per AASB 108.

DISCUSSION ON THE CASE STUDY 2…CONTD…
• Result and recommendation
 If above conditions satisfied, then change in rate can be justified.
 If conditions not satisfied, then it merely leads to increase in
profitability.
 Necessary disclosures to be made: Why changes made, what is
the financial impact and whether it improves the quality of
reporting.
 To be reported in Audit report as qualification.

DISCUSSION ON THE CASE STUDY 3
• Background: Research and Development expenditure all being
capitalized for the current year ended June’18.
• Rules and Standard:
 As per AASB 102, 111, 116 and 138, research expenditure to be
expensed off.
 Para 57(e) of AASB 138, development cost to be capitalised if
includes adequate technical, financial and other resources to
complete work.
 As per FASB, R&D to be capitalized only if future economic benefits
realizable and it can be reliably measured.

DISCUSSION ON THE CASE STUDY 3…CONTD…
• Result and recommendation
 Company needs to demonstrate future economic benefits out of it
for capitalization of development costs.
 Research costs needs to be expensed off in any case.
 To be reported in Audit report as qualification.

CONCLUSION
• Wrong and incorrect accounting principles being followed by
company.
• The remuneration policy is encouraging creative accounting as bonus
directly linked in growth in profits.
• Approval by Juilette without proper justification.
• Transactions to be reported in Audit report as qualification.