Report on KPMG Accounting Scandals and Standard Updates FASB

This report discusses current developments in accounting, focusing on KPMG's accounting issues and an update on accounting standards by the Financial Accounting Standards Board (FASB). The analysis of KPMG addresses concerns raised about the firm's role in accounting scandals, its financial health, and regulatory scrutiny, suggesting a need for market intervention and a spin-off of non-audit work. The report also examines the FASB's proposed accounting standard update on collaborative arrangements (Topic 808), highlighting targeted improvements and seeking public comments on the proposal to enhance comparability and revenue recognition. The update aims to align accounting practices with Topic 606, ensuring consistent and transparent financial reporting.

Current Developments in Accounting 1
Current Developments in Accounting

Current Developments in Accounting 2
Table of Contents
Q.1 Accounting Issues.................................................................................................................................3
Introduction.............................................................................................................................................3
Discussion on the Article.........................................................................................................................4
Discussion of the Theory and its Application on KPMG.........................................................................5
Conclusion...............................................................................................................................................7
Q.2 Accounting Standard Update................................................................................................................8
Opinions and Comments of Other industry Players on the Changes......................................................11
Discussion and Analysis of Comments..................................................................................................14
References.................................................................................................................................................18

Current Developments in Accounting 3
Q.1 Accounting Issues
Introduction
This report emphasizes on the discussion of the news article named Concerns raised about ‘too
big to fail’ KPMG as it facilitates in the evaluation of the issues faced by KPMG in relation to
accounting practices. Besides this, it also provides the information related to different theories
and concepts related to accounting and relate it to the issues faced by the company.
Name of the Article Chosen: “Concerns raised about ‘too big to fail’ KPMG”
Author: Madison Marriage, Caroline Binham and Martin Arnold (Published on: 20th July 2018)
Name of the Magazine: Financial Times
Source of the article: https://www.ft.com/content/f660b6a2-8b75-11e8-bf9e-8771d5404543

Current Developments in Accounting 4
Discussion on the Article
It is identified that there are several companies such as Arthur Anderson that has collapsed due to
the existence of the accounting scandal by Enron in the year 2002 due to which the company has
written off various audit professions. It is also found out that there are various big accounting
firms that could fail in a catastrophic manner due to the impact of Arthur Andersen demise. It is
also found out that there is a decline in the profits of the KPMG before tax to fifth in the year
2017 to £301 million. The company has put aside £ 56 million for the purpose of meeting out the
potential fines and legal costs. It is also estimated that KPMG will overcome its recent
difficulties as it is in favor of the interests of regulators and competitors such as PwC, Deloitte
and EY. KPMG is involved in several big scandals across three continents in spite of this, its
biggest international clients are not distancing from the firm (Marriage, Binham & Arnold,
2018).
The different scandals in which there is an involvement of KPMG such as collapse of Carillion
and from the investigation it is found out that the three partners of the KPMG are accused of
leaking confidential information in improving inspection of the results for the firm. Despite of
the involvement in different accounting scandal, the company is able to attain the contract of
audit for the mining company such as Rio Tinto. The financial health of KPMG is strong and
have gained growth across advisory, audit and tax. KPMG has failed in spotting the signs of
financial instability which led to financial crisis due to which the regulators have increased its
scrutiny (Marriage, Binham & Arnold, 2018).
It is identified that the commission has reported that the auditors have failed to expose the risks
related to the banks in their financial statements in the year 2013 during the crisis. The audit
done by KPMG has failed to inform the users about the financial condition of the banks in an
accurate manner. The commission has criticized as the quality of the audits in an effective

Current Developments in Accounting 5
manner. There is a presence of various fears regarding the shape of the audit market despite of
the various attempts by different international authorities to lose the grip on the market such as
introduction of mandatory audit or rotation across Europe caps on the amount of consulting work
auditors (Marriage, Binham & Arnold, 2018).
The CMA is required to investigate the cases of audit firms in order to reduce the competition
and overcome the conflicts of interest in the sector. The collapse of the KPMG would results in
leaving of the three big audit firms in the market which has a significant influence on the level of
competition existed in the market. In order to resolve the issues there is a requirement of the
intervention in the market by the government to prevent the disruption of the collapse of the
firm. It is suggested that KPMG should spin off the non audit work by creating a separate firm.
KPMG Audit should only focus on audit and should invest more in the company to ensure
effective implementation of the audit operations (Marriage, Binham & Arnold, 2018).
Discussion of the Theory and its Application on KPMG
It is essential for the firms to comply with the standards and principles of accounting while
recording the financial transactions in the form of different financial statements in order to
communicate accurate information related to the financial performance and position of the
company to the users. The main reason behind the compliance with the standards and principles
of accounting facilitates in bringing consistency and uniformity in the presentation of the
information in different financial statements which in turn provides the benefits to the users to
compare the information with other players in the market in order to make financial decisions.
This also helps in elimination of the occurrence of the conflicts among the different stakeholders
of the company (Moran Reynolds & Gannon, 2018).
Apart from this, nowadays, there is a establishment of the regulatory authority that intervenes in
the activities of the company in order to protect the interests of the stakeholders. The companies

Current Developments in Accounting 6
nowadays appoint external auditors to oversee the financial statements of the company before
communicating it to the end users as it facilitates in presenting the accurate information to the
end users, but now the auditing is transformed into a separate profession and there is an existence
of big companies or auditing firms that carries out audit function and are involved in various
accounting scandals (Duska, Duska & Kury, 2018).
In case of KPMG, it is required by the company to adopt ethical practices and check or monitor
the financial results of the company in accordance with the set accounting standards and
accounting principles in order to bring transparency in the operations carried out by the firms. It
is essential for the regulatory authorities to impose penalties of large amount on the auditing
firms if they adopt fraudulent activities while carrying out the audit function due to
misrepresentation of the information in the financial statements of the company. The main reason
behind it is that it results in the creation of the conflict between the interests of different
stakeholders (Duska, Duska & Kury, 2018).
It is essential for the audit company i.e. KPMG to gain information related to different operations
and activities being performed by the company in order to provide true insights related to the
financial strength and position of the company and protect the interest of the stakeholders in a
significant manner. It is also identified that KPMG is able to measure the loss in the quantitative
or monetary terms incurred by it in the form of provisions set by them to meet out the penalties
and charges levied. Although it is also identified that the companies that have faced accounting
scandal has complied with the accounting standards developed by IASB but has made
modifications in them in order to attain the desired results in order to fulfill their goal of profit
maximization in order to attract more number of stakeholders (Leitoniene, Sapkauskiene &
Dagiliene, 2015).

Current Developments in Accounting 7
The audit company is able to measure the performance of the company in accounting and
quantitative terms which helps in provision of the adoption of the actions that can be applied in a
real manner. It is required by the audit company to expose the risks faced by the banks through
their financial statements which help in reducing the occurrence of bankruptcy of the financial
institutions and banks on a large scale. It is required by the government to establish a regulatory
authority that monitors the performance of the audit firms in order to prevent the situation of the
occurrence of the accounting scandal in the economy as a whole (Kuznetsova, Bogataya,
Khakhonova & Katerinin, 2017).
Conclusion
It can be concluded that despite of the fact that KPMG is involved in various accounting
scandals, the companies at the international level appoints it to audit their financial statements
and accounts in order to provide accurate information to their users. Along with this, it is
identified that the accounting issues due to which the scandals have happened is due to the non
compliance of different accounting theories in an effective manner.

Current Developments in Accounting 8
Q.2 Accounting Standard Update
The Proposed Accounting Standards Update: Collaborative Arrangements (Topic 808): Targeted
Improvements
Issued: 26th April 2018
Comments due: 11th June 2018
Source: https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?
cid=1176170411165&acceptedDisclaimer=true

Current Developments in Accounting 9
The accounting standard authority named Financial Accounting Standards Board (FASB) has
released the exposure draft related to the proposal before the implementation of the Accounting
Standard in Australia. The main reason behind the release of the exposure draft related to the
proposed amendments in the accounting standard is to seek comments from the public on the
proposal. FASB has released the exposure draft to make proposed amendments related to
targeted improvements in Topic 808 i.e. Collaborative Arrangements. As per Topic 808,
collaborative arrangements refers to contractual arrangement in which two or more parties to
actively participate in a joint operating activity exposed to significant risks and rewards
depending on the commercial success of the activity (FASB, 2018).
The main reason behind the issuance of the proposed accounting standard update is that Topic
808 does not include the comprehensive recognition or measurement for collaborative
arrangements and its accounting is based on accounting policy election and analogy to other
accounting literature. It is also found out that there is an occurrence of the differences in the
application of the method to recognize their arrangements that results in diversity in practice
adopted to account the transactions from the perspective of the economics of the collaborative
arrangement (FASB, 2018).
This accounting update affects those entities that are involved in collaborative arrangements.
This amendments in proposed update helps in making targeted improvements in generally
accepted accounting principles for collaborative arrangements. There is a requirement of addition
of account guidance in this accounting standard in order to align it with Topic 606. In case the
participant in the collaborative arrangements is customer then there is a need of gaining
clarification of the transactions among collaborative participants to account for revenue under
Topic 606 (FASB, 2018).

Current Developments in Accounting 10
In such situations the guidance in Topic 606 is applied that includes measurement, recognition,
disclosure and presentation requirements. It is also required for the companies to present the
transaction not as revenue if the transaction is not directly related to sales to third parties and the
counterparty participant in collaborative arrangements is not a customer. The main provisions
differ from current generally accepted accounting principles as it provides the guidance related to
whether some of the transactions carried out between the collaborative participants are accounted
for revenue aligned with the guidance in Topic 606 (FASB, 2018).
These amendments facilitates in provision of effective comparability in the categorization as
revenue between collaborative participants. It is also identified that prior to the issuance of Topic
606 the revenue from collaborative arrangements have been included by stakeholders as the
revenue recognized as per Topic 605 i.e. revenue recognition, recognized through analogy to the
guidance in Topic 605 and revenue recognized through the application of a policy election. The
amendments proposed related to collaborative arrangements reflect that it helps in the
improvement in comparability as these amendments has permitted that the revenue will be
recognized only in the case of those transactions where collaborative arrangements are indirectly
related to sale to third parties in accordance to Topic 606. There is no change have been made in
the requirements for those transactions that are directly related to sales to third parties (FASB,
2018).
It is also found out that FASB also invites organizations and individuals to provide their views
and opinions and comment on the matters included in the proposed update on the issues and
questions related to the amendments made. The comments are requested in the form of provision
of support and against towards the proposed guidance which is helpful for identification and
explanation of the issue or question to which they relate. Besides this, those people or

Current Developments in Accounting 11
organisation that disagrees with the amendments is allowed to provide suggestion with suitable
justification in an effective manner (FASB, 2018).
Opinions and Comments of Other industry Players on the Changes
Comments of four market players are discussed below on the proposed changes. The names of
these organizations are
Source of comment from Pfizer:
https://www.fasb.org/cs/BlobServer?
blobkey=id&blobnocache=true&blobwhere=1175835890909&blobheader=application

Current Developments in Accounting 12
%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-
Disposition&blobheadervalue2=650813&blobheadervalue1=filename
%3DCOLLAB.ED.002.PFIZER_INC._LORETTA_V._CANGIALOSI.pdf&blobcol=urldata&bl
obtable=MungoBlobs
Source of comment from Johnson & Johnson:
https://www.fasb.org/cs/BlobServer?
blobkey=id&blobnocache=true&blobwhere=1175835891867&blobheader=application
%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-