Accounting Theory and Current Issues: Financial Fraud Analysis

This report provides an in-depth analysis of accounting theory and its application to real-world financial reporting issues, specifically focusing on financial fraud. It begins with an overview of accounting theory, including its role in financial statements and the regulatory framework in Australia. The report then delves into the Australian financial reporting environment, highlighting key regulations and bodies such as the AASB, ASIC, and ASX. A significant portion of the report is dedicated to a chosen financial fraud, examining its key facts, and how Positive Accounting Theory (PAT) hypotheses predicted the actions of the involved parties. Furthermore, the report identifies specific accounting regulations that were violated during the fraud. The report concludes with a discussion of the lessons learned from the fraud and recommendations for preventing similar incidents in the future, offering a comprehensive understanding of accounting principles and their practical implications.

Accounting
Theory and
Current Issues

Table of Content
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
TASK 2............................................................................................................................................2
TASK 3............................................................................................................................................3
A) Key Facts about chosen financial Fraud.................................................................................3
B) Positive Accounting Theory’s (PAT’s) hypotheses predicted the practice(s) of the parties
involved in your chosen accounting fraud...................................................................................4
C). Specific accounting regulations which were violated...........................................................5
D) What lessons have been learnt from your chosen accounting fraud?.....................................7
E) Recommendation....................................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Accounting theory is a system of assertions, structures, and techniques which are used for study
and application of these principles of financial statements. Accounting theory research includes
analyzing both traditional principles of financial reporting along with updating and applying
accounting methods to legislative system regulating financial reporting and financial statements.
(Schroeder, Clark and Cathey, 2019) All Accounting Theories are constrained by accounting
conceptual structure. This structure is provided by Financial Accounting Standards Board
( FASB), an autonomous organisation which operates to define and set main goals of corporate,
both government and private, financial reporting. Additionally, accounting theory can be
considered as logical reasoning which aims to assess and direct accounting practices. As
regulatory requirements change, accounting theory also helps establish modern accounting
methods and techniques. This assignment gives a brief understanding of various accounting
theories adopted and discusses present regulatory framework. It also analyses accounting
financial reporting environment. For the better understanding of accounting theories one real life
experience is taken for financial reporting fraud.
TASK 1
Australia does have a variable disclosure regime within which financial statement
specifications are established by type of entity, primarily based on entity's importance of
customer interest. Entity types might be classified as:
 Required to disclose enterprises mainly mentioned companies and certified controlled
investment schemes / recommended interest agreements which have listed financial
instruments or issued shares or any other financial instruments as a result of circulation of
a brochure;
 Non - listed Public corporations and limited by shares companies (that is, a private
company which fulfils at least two of below conditions: $10 million or more gross gross
margins, $5 million or more gross assets and 50 or more staff members); and
 Small owned business.
Under Corporations Law, all disclosing entities, companies and registered managed investment
schemes are required to maintain records that accurately record their financial transactions and
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that would allow the preparation of financial statements and the audit of those financial
statements.
All organizations must file annual financial statements, except for limited proprietary companies.
The consolidated financial statements include a balance sheet, a declaration of income and loss
and a statement of cash flow (Al-Htaybat, von Alberti-Alhtaybat and Alhatabat, 2018). The
issues to be disclosed in financial statements are contained in accounting standards made by the
Australian Accounting Standards Board ( AASB) and enforced by Corporate Law. The
Corporate Law also provides for the preparation of consolidated financial statements where such
statements are needed by an accounting standard. This usually happens in circumstances where
one entity is controlling one or more other entities. Annual financial statements must be
distributed to the entity's members (for approval at the reporting entity's or companies annual
general meeting) and must be filed with the Australian Securities and Investment Commission
(ASIC).
In addition to meeting the criteria of annual filing, reporting organizations are expected to file
half-yearly financial statements.
In general, these are an abbreviated version of the annual financial statements. Half-year
financial statements must be issued with ASIC but must not be distributed to members. All
annual and semi-annual financial statements must be:
Accompanied by a briefing by the directors on entity’s operations;
Followed by a declaration by the directors as to whether the reports meet the criteria of the
accounting principles and provide a accurate and fair view of the financial condition of the
company and whether the organization is solvent; and
Audited in case of half-yearly financial statements audited or reviewed by a registered company
auditor who is independent of an organisation
TASK 2
Yes Australian financial reporting environment is over regulated as an entity has to report
to various government bodies. As Australia aims at promoting investor confidence and honesty
in the economy, companies and capital markets. A promoter of this is transparent and accurate
financial reports prepared according to the specifications of the legislation. In all Australian
states and territories same standards of reporting apply. The Australian Taxation Office (ATO),
the Australian Securities and Investment Commission (ASIC) and/or the Australian Stock
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Exchange (ASX) may allow businesses in Australia to report to. There are various other
requirements which a company has to submit to various authorities some of it are mentioned
below:
Business Activity Statement: Businesses operating in Australia are expected to apply to the
Australian Taxation Office (ATO) a Business Operation Statement (BAS) to make payments and
disclose their tax obligations (Nicholls, 2018). Some individuals can need to lodge a BAS, too.
The Business Activity Statement is personalized to any (or individual) business. This can be
deposited online, by mail or in person. Based on when instalments are due, a BAS must be
deposited monthly, quarterly or annually.
Requirements for financial reporting
The Australian Securities and Investments Commission (ASIC) is Australia's regulator for
corporate, financial, and financial services. Businesses based in Australia are expected to prepare
and file ASIC financial reports, generally at end of fiscal year. The auditing of annual reports and
financial statements is required. Enterprises can be excluded from financial reporting in such
conditions.
Reporting requirements on Australian stock exchange
Companies which are listed on Australian Stock Exchange (ASX) are bound by constant,
periodic regulations on disclosure.
Australian accounting standards
Australian Accounting guidelines are established by an autonomous Australian Government
body, the Australian Accounting Standards Board (AASB). The criteria are corporate legislated
specifications. They will also refer to all other general purpose financial reports of reporting
agencies in public and private sectors (Smith, 2019). The Australian accounting standards meet
International Financial Reporting Standards (IFRS) criteria. Although the International
Accounting Standards Board (IASB) is responsible for most of standard setting, the AASB
exercises standard-setting authority on matters directly applicable to Australia.
TASK 3
A) Key Facts about chosen financial Fraud
Financial crises are just as old as financial sector itself, but number of high-profile corporate
crashes in 2018, coupled with a trio of major audit sector reviews, put the topic of accounting
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scandals squarely at the forefront. The fall of high street brands like Ted Baker and Patisserie
Valerie and the continuing effects of the BHS implosion all illustrate problems that are currently
under extreme scrutiny in the form of the Kingman Report, the report by the Competition and
Consumer Authority and the pending analysis by Donald Brydon.
In December last year the first of these two published their results on the industry. The
review of the Financial Reporting Council (FRC), the independent regulator of auditors,
accountants and actuaries, by Legal & General Chairman Sir John Kingman, had harsh words to
say about its subject matter, calling for it to be abolished entirely and replaced by the Audit,
Monitoring and Governance Authority (ARGA) (Breton and Breton, 2018). Such propositions
were approved by the Council. "Having spent much of his life in obscurity," he said, "the FRC is
now under unparalleled spotlight [placing it under] intense and relentless scrutiny.
The Department of Business, Energy and Industrial Strategy (BEIS) has also conducted its
own review of the sector in the face of those concerns, while the Select Committee is also
considering adopting the CMA findings. The latter outlines significant market issues and
recommends changes to the law to boost the industry.
Major problems include the fact that businesses pick their own auditors, meaning they go for
those with "cultural fit" or those with "chemistry" rather than selecting a firm that would provide
the best scrutiny possible. Another issue was limited competition, with 97 percent of audits being
performed by the Big Four firms.
B) Positive Accounting Theory’s (PAT’s) hypotheses predicted the practice(s) of the parties
involved in your chosen accounting fraud.
Positive Accounting Theory
Positive Accounting Theory aims to make accurate estimates of events in the real world and
to turn them into accounting activity (Breton, 2018). Though normative theories aim to say what
should be done, Positive Theories attempt to clarify and forecast
Actions such as what accounting strategies businesses should opt for
 What businesses will respond to new Accounting Standards
 The ultimate aim is to consider and forecast accounting policy decisions across
various firms. This admits there are economic implications.
Under PAT, companies are eager to improve their survival chances, so they coordinate
themselves effectively. Industries are seen as collecting the contracts they have entered into. The
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organization would want to reduce the costs associated with contracts in relation to PAT, as there
is a need to be effective. Examples of contract costs include cost negotiation, renegotiation, and
monitoring. Contract costs include accounting factors, as contracts can be stipulated in terms of
accounting details such as net profit and financial ratios. The firm should select the accounting
policies which best understand the need to mitigate contract costs. PAT recognizes that changing
circumstances require flexibility for managers when choosing accounting policies.
C). Specific accounting regulations which were violated
In the above given case various accounting regulations which are being violated are given
below:
1.) Rent rises
Many lessors offer benefits such as beginning "free rent" or terminating the lease agreement.
GAAP accounting allows the operating lease expenses to be divided by the number of months in
the contract for measuring monthly rent expenses using the cumulative rent payments over the
lease period. Any difference between payments and expenses on the balance sheet would be
classified as either an actual or non-current asset or liability.
2.) Depreciation
As manufacturers and entrepreneurs follow Industry 4.0, they are rising revenue by introducing
improvements to equipment and rapid expansion powered by the new tax legislation, which
offers generous tax write-offs by Though companies can now write off up to $ 1 million through
section 179, and bonus depreciation laws are the best they've ever been (leading to a significant
spread between tax depreciation and book depreciation), these accelerated methods do not
comply with GAAP reporting rules (Hadi, 2019). Additionally, companies often misapply the
39-year tax depreciation method for leasehold improvements, but GAAP stipulates that these
improvements should be depreciated over the shorter period of useful life or lease, including
renewable options.
3.) Labor Cost capitalisation
Direct costs such as labor and raw materials are often used to valuate inventory production, but
the capitalisation of overhead is often ignored as a GAAP reporting obligation. Overhead will be
based on variable and fixed variables, both based on real use drivers and formulae created by
capability versus cost allocation output. By excluding or not applying overhead calculations,
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there may be large inventory valuation errors on the balance sheet and related costs of the goods
sold on the income statement.
4.) Accrued Holiday / Paid Time Off
Employers who have a "use it or lose it" strategy often pay cash for unused sick time at some
point ( i.e. date of graduation, unique date of calendar or business exit). While a formal written
agreement by itself does not determine a potential employer liability, an implicit oral and agreed
policy is sufficient to cause the potential right of an employee to compensation that may need to
be incurred (Tweedie, 2018). It is not unusual that the liability associated with such policies can
be significant — and even more pronounced when a company sells a corporation, depending on
the duration of the employee tenure and vacation time given. As a multiple of earnings, the buyer
will factor this liability into both the required working capital target and the computing enterprise
value.
5) Unknown tax-points
FASB ASC Topic 740 established a threshold condition where a tax position taken in a tax return
that was previously filed — or one to be taken on future tax returns — needs to be recognized on
the current financial statements. There is a two-step process to determine uncertain tax positions
that must be recognised:
 A "more likely than not" strategy (more than 50 per cent) that an IRS audit would
maintain a tax status
 The tax status is assessed at the maximum amount of tax benefit / cost expected to reach
50 per cent
Additionally, businesses operating outside their "state of residence" can face income tax
liability in certain states depending on the type and extent of the business' operation.
If the company does not register to do business or register to file tax returns in these outside
states, the GAAP financial statements would not be prevented from accumulating the tax liability
and disclosing it on the financial statements (Ong and Djajadikerta, 2019).
Other tax uncertainties which should be considered are:
 Expenditures on company (meals and entertainment, unfair compensation)
 Valuation of deferred tax assets (net losses from operations)
 Pricing transition between relevant foreign parties
 Built-in gains tax (BIG) on S-Corp transformation
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 IRS tests pending
 Small and Medium-sized Entity Structure (SME FRF)
Many private, small and medium-sized companies consider GAAP reporting daunting
because of its scope and limited resources, Johns said, but this category can qualify for a non-
GAAP substitute — the Financial Reporting Framework for Small and Medium-sized Entities
(FRF for SMEs). This accounting system, more focused on cash flow, relieves qualifying
businesses from the unrealistic accounting requirements dictated by GAAP pronouncements and
mandated by Fortune 500 companies.
D) What lessons have been learnt from your chosen accounting fraud?
Lessons which can be learnt from the above case are as follows:
1) Line Chef
In our first case study, over three years, a line manager who did not have formal access to
the accounting system or online banking of the business had managed to take $4.5 million. They
were a highly regarded and long-term employee but they were able to set up 'Ghost Creditors' to
approve payments because they were responsible for approving different contractors.
Key warning signs were given which were not picked up:
 Turnover grew but cash flow and profitability remained poor.
 The alleged suspect was very careful in relation to contractor’s ties.
 They have also tended to live beyond their means.
 To avoid this type of fraud, businesses should know how to spot these signs in the future,
and also create enough controls around contractor vetting and approval processes.
2) Practitioner
Our next example is a training officer, who again did not have access to the accounting
system or online banking of the company. The suspected suspect would carry out customer calls,
make reservations and provide training services. They managed to steal $250,000 over two years
by issuing fake invoices with listed information of the perpetrator's own bank account. No cash
was ever identified as missing because the transaction was never registered in the system (Icardi
and Urraci, 2018). The attacker was found only because the company reviewed the certificates
issued for training and detected a significant number where the accounting system did not report
related sales. The company was aware of variances in certificates of training but thought it was a
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machine malfunction. This shows that something that seems like a normal mistake always needs
to be investigated to ensure that nothing untoward is happening. The business also sacked the
perpetrator but did not first obtain legal advice, which resulted in an unfair dismissal claim-
demonstrating the importance of gaining legal advice before taking action.
3) Chief Financial Officer
In this case, the CFO has had sole access to the accounting system of the company. We were
highly respected, and had growing trust in the team. Through collecting "true investors" and
paying them to the CFO's own bank account, the CFO managed to steal $3.5 million over nine
years. The fraudulent transactions were conducted outside business hours and from another IP
address, which raised a red flag.
The organization should have noticed other warning signs:
 The CFO didn't have timely financial reports.
 They will not allow anyone to see bank statements from the company.
 They loaned money to the organization to help pay employee wages during tough times.
 Businesses should pay attention to this conduct of the red flag and ensure that no one has
exclusive access to systems and accounts.
4) Accounts Officers payable
The APO has been a long-term employee. While they were not part of the approval
process for the contract, they were responsible for entering invoices and maintaining files
for.aba. Over three years, they took $1.2 million by altering.aba files after approval and before
uploading to the online banking network of the company. To ensure the investors were properly
compensated, invoices had been duplicated.
Red flags with:
 The suspect wouldn't take any annual leave because investors seeking payment needed to
be in the office to make field calls.
 They were arriving first and leaving last.
 By processing them as a -1 or adding a slot, they were getting round duplicated invoices.
5) Charge Officer
In this example the payroll officer had access to the payroll system by administration. We
were a long-term employee who became well regarded and renowned for their work as
volunteers. They managed to take $1.9 million over three and a half years by changing bank
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account details of terminated employees to alternative bank accounts, and then continuing to
make payments. A cross-check between HR and payroll files identified significant problems, as
well as multiple changes to bank accounts of employees. This illustrates the value of regularly
updating this form of program and documents to ensure there is no fraud.
E) Recommendation
Stopping fraud requires three distinct phases:
 Prevention: It starts with governance culture which covers things such as the company's
code of ethics, policies on fraud prevention, training and education programs and job
screening.
 Detection: Includes post-transaction reports, data management, and recruiting external
and internal auditors; It is also critical that you have a whistle blower programme.
 Response: This includes creating a recovery plan for fraud, conducting investigations,
taking disciplinary action, getting civil recovery and taking corrective action.
Following are the two recommendations which can be applied:
Auditor responsibilities
An auditor who performs an audit in compliance with Australian Auditing Standards is
responsible for obtaining fair assurance that the financial report taken as a whole is free of
material errors, whether due to fraud or error. Regardless of the inherent weaknesses of an audit,
there is a significant risk that any of the financial report's factual misstatements will not be
found, even though the audit is carefully prepared and conducted in compliance with Australian
auditing standards
Audit evaluation: Evidence
The auditor shall determine whether analytical procedures which are conducted near end
of audit suggest a previously unrecognized possibility of material misstatement due to fraud
when forming an overall opinion as to whether the financial report is consistent with the auditor's
understanding of the company. If a mistake is found by the auditor, the auditor shall determine
whether such a mistake is indicative of fraud. When such an indication occurs, the auditor shall
determine the implications of the error in relation to other aspects of the audit.
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CONCLUSION
Accounting theory are a given set of information which is used by in an organisation for
financial reporting. The above assignment indicates the various accounting theories which are
used and it also identifies the recent regulatory framework which is followed while making
financial reports of an organisation. It also states a real life fraud and discuses various regulations
which were violated.
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REFERENCES
Books and Journals
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and analysis:
text and cases. John Wiley & Sons.
Al-Htaybat, K., von Alberti-Alhtaybat, L. and Alhatabat, Z., 2018. Educating digital natives for
the future: accounting educators’ evaluation of the accounting curriculum. Accounting
Education, 27(4), pp.333-357. Brocard, M., Franke, B. and Voeller, D., 2018.
Enforcement actions and auditor changes. European Accounting Review, 27(3), pp.407-
436.
Nicholls, A., 2018. A general theory of social impact accounting: Materiality, uncertainty and
empowerment. Journal of Social Entrepreneurship, 9(2), pp.132-153.
Smith, M., 2019. Research methods in accounting. SAGE Publications Limited.
Breton, G. and Breton, G., 2018. For a Definition of Accounting', A Postmodern Accounting
Theory (pp. 65-96). Emerald Publishing Limited.
Breton, G., 2018. A Theory of Accounting. In A Postmodern Accounting Theory. Emerald
Publishing Limited.
Hadi, D.A., 2019. Sharia Accounting Theory in Indonesia in Moral Perspective. Global Business
and Management Research, 11(1), pp.96-109.
Tweedie, D., 2018. After Habermas: Applying Axel Honneth’s critical theory in accounting
research. Critical Perspectives on Accounting, 57, pp.39-55.
Ong, T. and Djajadikerta, H.G., 2019. Adoption of emerging technology to incorporate business
research skills in teaching accounting theory. Journal of Education for Business, 94(7),
pp.480-489.
Icardi, U. and Urraci, A., 2018. Novel HW mixed zig-zag theory accounting for transverse
normal deformability and lower-order counterparts assessed by old and new elastostatic
benchmarks. Aerospace Science and Technology, 80, pp.541-571.
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