Comparative Financial Reporting: Accrual Manipulation and Prevention

This report provides a comparative analysis of financial reporting, focusing on accrual manipulation. Section A presents consolidated balance sheets under different acquisition scenarios, illustrating the impact on goodwill and non-controlling interests. Section B delves into the reasons why management might manipulate accruals, highlighting the incentives related to earnings management and the perceived safety compared to other manipulation methods. It also outlines several accrual manipulation prevention methods, including reconciliation processes, external audits, review of financial activities, financial statement analysis, profitability ratios, strong corporate governance, and internal audits. The report emphasizes the importance of detecting and preventing accrual manipulation to maintain the integrity of financial statements and ensure accurate financial reporting.

COMPARATIVE
FINANCIAL REPORTING

Table of Contents
Section A.........................................................................................................................................3
Section B..........................................................................................................................................8
Explaining the reason why management might wish to manipulate accruals........................8
Accrual manipulation prevention methods.............................................................................9
REFERENCES..............................................................................................................................11

Section A
A. Consolidated Balance Sheet when Rose Plc. acquire 100% of Tulip
Particular Rose (£m) Tulip (£m) Consolidated (£m)
Assets
Non-Current Assets 488 400 888
Investment in Tulip 352 352
Current assets 40 60 100
Goodwill Asset 0
Total Assets 880 460 1340
Liabilities
Current liabilities 32 20 52
Total Liabilities 52

Equity 500 400 900
Retained Profit 348 40 388
Total Equity 848 440 1288
Total Shareholders Liability and Equity 880 460 1340
A. The consolidated balance sheet used to present the financial position of the group of
companies. This is done by determining the statements of the main company with its
subsidiary company. If the interest on the fair is more than the net assets than the extra
amount will be considered on the account of goodwill in the statement of the company.
By determining the same the goodwill of the company is determined at £8 million as the
interest that is non-controlling is extra than the net assets of the company.
Particular Rose (£m) Tulip (£m) Consolidated (£m)
Assets
Non-Current Assets 488 400 888
Investment in Tulip 352 352

Current assets 40 60 100
Goodwill Asset 8 8
Total Assets 888 460 1348
Liabilities
Current liabilities 32 20 52
Total Liabilities 52
Equity 500 320 820
Retained Profit 348 40 388
non-controlling interest 88 88

Total Equity 936 360 1296
Total Shareholders Liability and Equity 968 380 1348
B. In the current case given, the goodwill of the company is around £32 million and this is
also the non-controlling interest as the amount is higher than net assets.
Particular Rose (£m) Tulip (£m) Consolidated (£m)
Assets
Non-Current Assets 488 400 888
Investment in Tulip 352 352
Current assets 40 60 100
Goodwill Asset 32 32

Total Assets 912 460 1372
Liabilities
Current liabilities 32 20 52
Total Liabilities 52
Equity 500 240 740
Retained Profit 348 40 388
non-controlling interest 192 192
Total Equity 1040 280 1320
Total Shareholders Liability and Equity 1072 300 1372

Section B
Explaining the reason why management might wish to manipulate accruals
Over the time it has been seen that generally the managers wish to manipulate accruals
for various reasons. It is a general phenomenon that cost based accounting is now not much
affective and organizations are rigorously relying on accrual based accounting. When managers
feel strong need of managing earnings then it is the best avenue to carry out their task, and they
manipulate accruals. For firms there are ample number of reasons to manage their earnings and
for managing earning the most viable avenue is manipulation of accruals. Accrual based earning
management is often found handy from manager's point of view (Owusu, Zalata, 2020)
Generally accruals are based on some estimations and forecasting which are not even
examined by any other party due to rigorous need of technical skills which offers a great window
to manipulate and shift earnings. It is the biggest reason that this form of manipulation is very
safe and does not surge any legal issues in general which makes it first choice when it comes to
manage earnings. It is actually not an ethical practice yet it is safer than other alternatives, since
there is less possibility to be garbed by any authority so often it is found the best choice for the
managers 9Rahul, Seth, 2018)
Cash components are very much factual in nature and any mistake may bring severe
perils to the organization so the best alternative is accruals which not only avoid the issue of
factuality but also gives good chance to make changes. Manipulation is not a fair practice and
managers are well aware of it but when it comes to manage earnings they seek sort of
alternatives which can help them to manage earning and also gives opportunity to make some
changes in future too.
While auditing or checking the accounts cash items and other aspects can be traced
effortlessly but accruals are very safe due to their nature. Accruals are less likely to be addressed,
it is totally based on some assumptions and estimations where sense of mistake is also permitted
which can be utilized for hiding such manipulations (Biswas, 2018)
If managers show higher earnings than would be suffering due to some laws and
regulations so this is the soft way to reduce their earnings and also avoiding any legal issues is
only possible with manipulation of accruals. While showing higher profits some issues may take
place such as attention of government, issues in tax management, higher expectations of society
etc. so the best way to avoid such notions is only possible with the help of manipulation in

accruals. To make the accounting figures favourable and taking advantage in short run is only
possible if there is a bit manipulations which not only help to save revenues but in shirt run some
instant negative impacts can also be eliminated so for fulfilment of such objectives managers rely
on manipulation of accruals.
From the above notions it can be summarized that the biggest cause of manipulation of
accrual is to manage revenues to benefit organizational objectives.
Accrual manipulation prevention methods
Accruals is basically concerned with having the financial accounting method that allow
the company to record before receiving the payments of goods and services sold or expenses are
recorded as incurred before the company (Iriyadi, 2019). This is basically based on managerial
estimates and forecast h so that cash components of earnings are more fact based. This leads to
the prone to errors and manipulation. For gaining the higher a fair and significant practices it is
important for the company to pay attention on preventing the manipulations of accruals as it
leads to results in impacting the materiality of financial tenements. In order to prevent the
accrual manipulation from happening it is important for the organization to develop the result of
the data to be invested in the disposal. Following are the ways in which the accrual manipulation
can be provided,
 Reconciliation of process for all the key accounts can promotes the controlling activities
for the manipulation of accrual. This can aid in find out the issues such as missing
checks and fraudulent activities . This information can be helpful in achieving the ability
to ensure that fair course of action by eliminating mentioned type of practices.
 Using an external auditor is one of the highly significant procedure that is helpful in
gaining the ability to prevent any frauds in financial statements so that having ability to
eliminate manipulations of actions can be done.
 The major course of action which can be used by firm for having ability to review
inventory, journal entries and electric transfer so that any fraud prevailing can be
avoided to get precise information to deal with such manipulation.
 Financial statement is considered to be very effective and strong method which is helpful
for referring to during the calculation of the financial statement . This allows the
accounting to manage the performance of the accounting department with accurate

measurement of the all the accrual entries. With the help of financial statement the results
of the organization can be determined and analysed to gain accuracy.
 Profitability ratios are also indicators of the income and expenses of the organization.
These are also helpful for analysing the financial viabilities and financial accuracy of the
organization. Having a financial ratio analysis of the accounting information will mitigate
the risks of understanding how to manage the use of accrual information.
 Having strict corporate governance culture in the organization is considered to be the
factor which is helpful for the organization to create a sense of responsibility towards the
management of the performance accounting information and their viability (Ghaleb,
Kamardin and Tabash, 2020).
 Internal audit is the procedure which is considered to be the most effective method for
analysing the areas which can be misinterpreted. This can be considered to be the factor
that is helpful for the recognizing the issues in the organization. This can also allow the
business to manage the few retail investments that can provide effective results and
performance.

REFERENCES
Books and Journals
Biswas, P., 2018. A study on the investigation of earnings manipulation in the form of accruals
earnings management (AEM): evidence from Bangladeshi firms. Biswas, P.(2018). A
Study on the Investigation of Earnings Manipulation in the Form of Accruals Earnings
Management (AEM): Evidence from Bangladeshi Firms. International Journal of
Management, Accounting and Economics. 5(11). pp.829-848.
Ghaleb, B. A. A., Kamardin, H. and Tabash, M.I., 2020. Family ownership concentration and
real earnings management: Empirical evidence from an emerging market. Cogent
Economics & Finance. 8(1). p.1751488.
Iriyadi, I., 2019. Prevention of Earnings Management through Audit Committee and Audit
Quality in the Award-Winning and Non-Winning Companies. Journal of Accounting
Research, Organization and Economics. 2(2). pp.155-169.
Owusu, A., Zalata, A. M., 2020. Is there a trade-off between accrual-based and real earnings
management activities in the presence of (fe) male auditors?. Journal of Business Ethics,
pp.1-22.
Rahul, K., Seth, N. 2018, December. Spotting earnings manipulation: using machine learning for
financial fraud detection. In international conference on innovative techniques and
applications of artificial intelligence (pp. 343-356). Springer, Cham.