The Sarbanes – Oxley Act of 2002 was passed after the corporate scandals of certain companies such as Enron and WorldCom. The responsibility of the senior management was increased to a higher level. First of all the management are supposed to establish and oversee the implementation of the internal controls of the firm (Strawser, 3). They must accept this responsibility. The acceptance of this responsibility must be disclosed in the financial statements. The management is also expected to disclose whether the internal controls have been effective in the financial reporting process. The Act expects the management to disclose the framework that was used to assess the effectiveness of the internal controls.
There are organizations that use the COSO (Committee of Sponsoring Organizations framework of the Treadway Commission). The auditors of the companies are expected to disclose in the financial statements whether the management assessment of the internal controls was effective. The management should carry out a fraud risk assessment in assessing the effectiveness of the internal controls (Strawser, 2). The controls should be structured and designed in such a way that they can detect fraud and other irregularities.
There should be controls over the cut-offs when it comes to the end of year reporting. When there are inadequate controls, it can lead to instances of misreporting of figures in the financial statements. It is also a vulnerable area when it comes to manipulation and creative accounting. Another area that the management should oversee is the off-balance sheet items. It is expected that the company will disclose all the off balance sheet items in the notes to the financial statements. These are items that influence the investor and shareholder’s decision making process. It is also an area that is prone to abuse. The management are often tempted to make the financial position of the company appear more favourable than it really is.
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Differences between financial and management Accounting
The differences between financial and management accounting comes in the areas of the users of the financial statements, the period in which they are prepared, the content or types of information disclosed and the regulatory oversight body handling the process.
Financial accounting refers to the profit and loss account, cash flow, balance sheet, cash flow and notes to the financial statements. The users of the financial accounting reports are the investors, the government, the shareholders and the creditors (Strawser, 1). The creditors want to know whether their interest is secured. Is the company taking more loans that would compromise its ability to repay them?
The potential investors want to know whether the company is performing well. Should they invest in the company? The shareholders want to know whether the company is making a profit, the value of their stock and whether they will receive any dividends. The government acts as the protector of the rights of the investors, shareholders and the creditors. It is interested to know whether the company is preparing its accounts according to the acceptable accounting standards and all the disclosures have been made. Tax procedures should also be adhered to.
In management accounting, the users of the financial statements are the internal departmental and senior managers of the organization. The management accounts show the trends and variances of the direct and indirect costs and profits of the company. The accountants compare the budgets prepared by the management with the actual figures. The figures are disclosed for each product separately so that the management can know which products are making profits and which are making losses.
Armed with this knowledge the management can know which production lines to terminate and which ones should have their capacity increased in order to earn higher profits. The adverse variances are checked to assist the management implement policies that will raise the efficiency of labour and the use of raw materials.
It is mandatory for the limited companies to release of publish their financial statements. This process is regulated by the Securities and Exchange Commission, the Financial Accounting Oversight Board and the Public Company Accounting Oversight board. It is a criminal offense to refuse to release the financial statements. It is also an offence for the management to knowingly release doctored financial statements that have material misstatements. There will be fines and the directors may be sent to serve prison sentences.
However, it is not mandatory for the company management to prepare management accounts. There is no regulatory body that oversees this exercise. Whether the company prepares these accounts or not is a management decision. It is advised that the companies should prepare quality management accounts as it will help them to make decisions strategically. These decisions will make the company gain a competitive advantage over other similar companies in its industry.
The information that is presented in the financial accounts is historical in nature. It is also presented after certain periods of time such as yearly, half-yearly and quarterly. The information should be presented in the period of one financial period which is usually a calendar year. Management account information on the other hand tends to be both historic and futuristic (Tanner, 1). It is about budgets and estimations compared with actual figures.
The accountants prepare projected balance sheets, income statements and cash flows for the various departments and units in the organization. The budgets are prepared showing the expected profits and the associated costs. The company will then compare the budgets and the historical actual profit and cost figures in order to analyse both the positive and adverse variances.
There is flexibility when it comes to the preparation of the management accounts. The manager should be able to access data anytime so as to be able to make the most strategic decision. The company can prepare the accounts anytime. While the focus in financial statements is on whether the information is accurate in management accounting the data should be relevant and timely (Weygandt, Kimmel and Kieso, 1). If it is not timely, the company will incur opportunity loss costs. It will lose its competitive edge.
In financial accounting, the auditors check on the objectivity of the financial information disclosed. The figures have to be verified. In management accounting, it is very crucial that the information be relevant for decision making. The information in the financial statements is summarized in nature. The users of the financial statements are interested in the sales and profits of the company for a certain period in time. Management accounts are however more detailed in nature. It shows the costs and profits of every department in the organization. In order to make decisions, the company chooses to go into the minute products and processes to know which ones contribute to the overall profit of the company.
While the financial accounts tend to be highly quantitative, the management accounts tend to also have qualitative information. The management wants to know about employee morale, customer service levels and leadership skills.
Strawser, Jerry. Part 1: Introduction to Managerial Accounting. 2008. Web. 30th
Tanner, Diane. Chapter 1: Introduction to Managerial Accounting. 2008. Web.
30th March, 2012.
Weygandt, Jerry, Paul Kimmel and Donald Kieso. Chapter 1: Accounting in Action.
2008. Web. 30th March, 2012.