University Assignment: Accounting Theory and Governance Case Study

This assignment is a case study analyzing accounting theory and governance, specifically focusing on two case studies. The first case study examines the ethics of earning management, exploring the reasons behind income smoothing, the techniques employed, and the factors influencing ethical decisions within an organization. The second case study delves into corporate governance, analyzing earning management techniques within a corporate setting, the role of the audit committee in detecting and limiting such practices, and the relationship between the audit committee and external auditors in ensuring acceptable limits. The assignment provides a detailed analysis of the application of accounting principles, ethical considerations, and corporate governance mechanisms in real-world scenarios.

MBS679 Accounting
Theory and Governance

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY ..................................................................................................................................3
CASE STUDY 1. The Ethics of Earning management - ...............................................................3
Question 1. ..................................................................................................................................3
Reason behind the NZSO wish to smooth income : ...................................................................3
Question: 2 ..................................................................................................................................4
Earning management techniques is used in NZSO : ...................................................................4
Question 03 - ...............................................................................................................................4
Factor of the business that considered in determining the ethical decision: ...............................4
CASE STUDY 2. Corporate Governance - ..................................................................................5
Question: 1...................................................................................................................................5
Earning management techniques is used that outline in the given article : ................................5
Question: 2...................................................................................................................................6
Role of the audit committee to detect and limit the earning management: ................................6
Question: 3...................................................................................................................................7
Relationship of the audit committee with the external auditors to assuring the earning
management in acceptable limits: ...............................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Accounting theory are the assumption and method that is used in the financial reporting
system. It review the accounting principle and standard and provides the regulatory framework to
the business aspects. These are the set of principle which are provides a framework in accounting
that evaluate and guide in new procedure and practices (Hussain, Rigoni and Orij,, 2018).
Whereas governance includes the manner of controlling the business activities and introduce the
new policies to change the business structure. In this particular theory of the business concern the
organisation can handles the business system by applying the business standard in corporates. In
order to better understanding this particular topic, this project report includes the case study
related to corporate governance and another case study is about ethics of the earning
management.
MAIN BODY
CASE STUDY 1. The Ethics of Earning management -
Question 1.
Reason behind the NZSO wish to smooth income :
The NZSO wish to smooth income in the business as business organisation is truly
depend on the donations and sponsorship. And Its income level is not as good as other company
have. If organisation is making continuously loss in the business then it would to be a big loss to
the management and donator too. This is a huge risk in the business to fall income at certain
level. This is identified that management of the NZSO can utilizes the available resources in the
appropriate manner in the business. For this reason the contributor and donator can decided not
to invest or donate money in the company and they can make the contribution to somewhere
else. So the ideal result for the company is not coming in way to enhance the level of income.

This is main the reason where company is lacking in terms of surplus and income. As perm these
reason company wish to enhance the level of sales and income to smooth-en its income.
The particular company has three stream of revenue generation such as sales, sponsorship
and government subsidy and fund. The main concern about the income is uncertainty in
subscription and door sales revenue. So they are losing the business fund in business. All are the
main reason behind smoothing the income by NZSO (Brooks and Oikonomou, 2018).
Question: 2
Earning management techniques is used in NZSO :
The earning management tool that is used by the NZSO company is ethical in certain
manner. The company is applies the certain tool in the business to resolve the issue of the income
and subscription to raise it to certain extended level. Company is using discretionary accrual
system in the business that is explained as non monetary income and expenses are recorded as
per the accounting system or method on realisation basis. These are the business transaction that
is yet to be realise. Company uses this system to structure the real business transaction in the
short period of time. In this particular function of the accounting, unforeseen cash surplus for one
year can be used in the following year in extra services to set of the deficit of the business. As
NPO are not having large sum of the surpluses to use in the future business operation. By using
this particular business function a business can manage the short term surplus and deficit in the
business (Nurunnabi, 2015).
The earning management tool of the accounting is ethical in the terms of the NPO
business as they can manage the accrual income of the business. Accrual method of accounting is
all about record the transaction that is occur in financial year. It can smooth the business function
by adjustment the excessive income into next financial year. This is the most reliable way to use
all the resource in the business to carry out the operating activities of the business organisation.
Ass it reduced the financial risk in the business by allowing the surplus in weaker section of the
business and also smoothing the business function of income and expenses (Al-Sartawi, 2018).
Question 03 -
Factor of the business that considered in determining the ethical decision:
There are certain factor that is considered in the ascertaining the decision is ethical or not.
The business techniques that are used in the particular business is ethical in making the short

term decision related to business surpluses and deficit. Important single factors that affect the
ethical decision-making procedure include personal moral philosophy or doctrine, stage of moral
improvement, motivation and other personal factors as well as organisational factors.
Organizational and corporate culture are the values, beliefs, norms, and rituals jointed by
members or employees for an business. Assessing the business condition in order to determine
the short term activities of the business to make the business decision. Financial risk is another
factor that makes a difference in the making the financial decision. By applying this tool
financial risk can be identified in the future that may take part in the business in long run time.
The other factor that fairness the financial statement to represent the accounting reports by using
the standard and method of accounting. It provides the quality information and statements that is
trust worthies to its investors (Hassan, Naser and Hijazi, 2016).
CASE STUDY 2. Corporate Governance -
Question: 1
Earning management techniques is used that outline in the given article :
In the given article of corporates governance, there are certain techniques that is used by
the audit committee to focus on the technical accounting procedure that determine the certain
way of discloser of the accounting and financial reporting. These accounting standard and
method provides a neat and clean reports to the management of the business. Whereas the audit
committee examines the financial statement whether these are true and fair or not. Companies
are required to forecast the earning by using the budgeting tool in the business to ascertain the
qualitative data that may occur in the future. There are two earning management techniques
cookie jar techniques and big bath techniques. In this article cookie jar tools is used. As per this
tools, it is normal characteristic that is based on the accusal accounting techniques. The
management of the business is required estimates the business record that will take part in the
future events. It is not easy task to certain the future estimation in the business. Estimation of the
expenses and income for the current period of time can provided a great impact on the financial
accounts of the business. This tools is also known as financial slack that boost the earning of the
business. This tools includes the future consideration of the business which are as follows:

 Estimation of the sales and resources allocation(Abdallah, Hassan, and McClelland,
2015)
 provision on the bed debts and write off
 amount of the inventories w/o
 Future estimation of the completion of the work
 approximation the amount of the warranty cost
Question: 2
Role of the audit committee to detect and limit the earning management:
The audit committee identified the quality of the report by assessing the using the
accounting tools and techniques by the firm (Ji, Ahmed and Lu, 2015). They check the financial
structure and statement of the company in order to analysis the report. The discloser of the audit
reports that presented by the company to audit firm to external examination of books of account
whether these are true or fair or not. They critically evaluates the process of the business
operation and activities that is used by the business in the accounting firm or to record the
financial transaction. They detect the error in the financial accounts by using the auditing tools.
Basically they look over the financial statement are prepared as per the accounting principle and
standard issued by board. Generally company is using the principle of accounting such as GAAP
generally accepted accounting principle while recording the business transaction in the books of
accounts. The audit committee identified the business transaction by applying this particular
proceeds in the business unit and provides the detail solution of the firm's management. They
designed the structure to the financial statements and analysis the business reports and statements
in the critical manner. The executives of the company resort the using the earning techniques in
the business affair that in figuring out the actual no. They limit the business transaction
cantoning the huge value transaction required more attention. The member of the audit
committee identify the business transaction in the earning management to provides the
judgement on the financial statement whether financial statements are true and fair or not
(Arunruangsirilert and Chonglerttham, 2017).

Question: 3
Relationship of the audit committee with the external auditors to assuring the earning
management in acceptable limits:
The transparency and reliability of the audit reports or financial information
through reporting and discloser of the business matter or affairs are mandatory in the business in
order to provides the better outcome to organisation. Earning management is incur when the
company is not able to meet the investor expectation. It look over on he used accounting and
financial tools that can impact the business reports. The relationship between the auditors and
external auditor are very deep in providing the knowledge and information related to business
affairs. Audit committee takes the help of the external auditor in the critical situation regarding
the business principle and method. The external auditor are the member of the particular firm in
which both the individual are working for. In terms of earning management they provides the
different kind of tools and techniques to the audit committee. With the help of the external
auditors the audit committee can manipulate the business decision by exercising the loophole in
the management techniques or in business operations (Katmon and Al Farooque, 2017) .
CONCLUSION
As per the particular report of case study related to accounting theory and governance, it
is articulated as different kind of earning management tool play a important role in the business
to provides the information on the future estimation of revenue and expenses of the business. It
includes the certain reason behind the smoothing the income. The various factor such as financial
risk play a crucial role in determining the ethical decision of the business. In the another case
study of the corporate governance, there are different kind of earning management techniques are
taken into account cookie jar tools that provides a future estimation of the different aspects for
the business. In addition to this case study covers the role of the audit committee which detect
the error in the earning management and external auditors are helpful in providing the
information to the audit committee.

REFERENCES
Books and journals:
Hussain, N., Rigoni, U. and Orij, R.P., 2018. Corporate governance and sustainability
performance: Analysis of triple bottom line performance. Journal of Business Ethics.
149(2). pp.411-432.
Brooks, C. and Oikonomou, I., 2018. The effects of environmental, social and governance
disclosures and performance on firm value: A review of the literature in accounting and
finance. The British Accounting Review. 50(1). pp.1-15.
Al-Sartawi, A. M .M., 2018. Institutional ownership, social responsibility, corporate governance
and online financial disclosure. International Journal of Critical Accounting. 10(3-4).
pp.241-256.
Hassan, Y. M., Naser, K. and Hijazi, R. H., 2016. The influence of corporate governance on
corporate performance: evidence from Palestine. Afro-Asian Journal of Finance and
Accounting. 6(3). pp.269-287.
Abdallah, A. A. N., Hassan, M. K. and McClelland, P .L., 2015. Islamic financial institutions,
corporate governance, and corporate risk disclosure in Gulf Cooperation Council
countries. Journal of Multinational Financial Management. 31. pp.63-82.
Arunruangsirilert, T. and Chonglerttham, S., 2017. Effect of corporate governance characteristics
on strategic management accounting in Thailand. Asian Review of Accounting. 25(1).
pp.85-105.
Hiebl, M .R., Duller, C., Feldbauer-Durstmüller, B. and Ulrich, P., 2015. Family influence and
management accounting usage—Findings from Germany and Austria. Schmalenbach
Business Review. 67(3). pp.368-404.
Katmon, N. and Al Farooque, O., 2017. Exploring the impact of internal corporate governance
on the relation between disclosure quality and earnings management in the UK listed
companies. Journal of Business Ethics. 142(2). pp.345-367.
Ji, X., Ahmed, K. and Lu, W., 2015. The impact of corporate governance and ownership
structure reforms on earnings quality in China. International Journal of Accounting &
Information Management. 23(2). pp.169-198.
Nurunnabi, M., 2015. Tensions between politico‐institutional factors and accounting regulation
in a developing economy: insights from institutional theory. Business Ethics: A
European Review. 24(4). pp.398-424.