Fraud and Accounting Balance Sheets

Q1. How have accounting techniques changed in recent years? How do they resemble practices in Italy during the Renaissance?
According to McCrie (2016), one of the great innovations which emerged during the Renaissance was that of double-entry bookkeeping. This technique, still used today, records the organization’s assets in one column or book versus liabilities, or claims on those assets (p.252). The term “dual entry” came into practice given both records were listed in dual columns. Still, some substantial innovations have taken place since the early days of double-entry bookkeeping, most notably the advent of technology such as computers to compute assets and store data. The actual book of originally-recorded assets in real time now called a journal and the book which records the cumulative data is called a ledger. Debits and credits are the terms are now the preferred terms for assets and liabilities. But while terminology has changed and techniques have improved, the same principle holds steadfast of the need to record inputs and outputs.
Q2. Discuss the importance of notes to consolidated balance sheets and statements of operations.
Although most of the entries on a balance sheet will be in numerical form, consolidation on the balance sheet can be useful for contextualizing information. It is possible to distinguish between current and fixed assets and liabilities. These financial elements are in a constant state of flux. For example, current assets take the form of cash or assets which can be easily converted to cash such as inventory (McCrie, 2016, p.253). As a result, they can be used to purchase fixed assets such as new factories, equipment, and machinery. But even this is not enough detail, as the depreciation costs of such inventory must be taken into consideration.
Liabilities are also distinguished by long-term and short-term liabilities. While short-term liabilities include accounts payable, notes payable, and regular accrued expenses such as wages owned to employees, long-term liabilities include long-term debt that must be paid by the company, such as to lenders (McCrie, 2016). Dividends payable to shareholders are all forms of liabilities (McCrie, 2016). Again, the different character of these liabilities must be taken into consideration for a full portrait of the company’s financial picture. While excessive liabilities in the form of costs are problematic, not all liabilities are equally so.
In general, debts to lenders must be paid back (including bondholders) while holders of equity are acknowledged to have taken a risk in buying shares and have a lower priority in terms of seeing a return upon their investment. Likewise, some liabilities have little flexibility (such as rent) while others can be terminated (such as employees who can be let go). Further, qualitative notes can provide information and context to the data, and help shareholders, employees, and the general public gain a better sense of the true health of the company, versus the financial picture presented strictly according to accounting rules.
Q3. Cite examples of separation of controls in addition to those discussed in the text.
Examples of separation of controls include separating cash, accounts receivables, and payrolls on a balance sheet. This can, according to critics of the practice, be less efficient, since it requires multiple persons to enter different types of data in the ledger and may lead to more rather than fewer accounting errors, contrary to what is presumed, if the two employees do not communicate (“Separation of Duties,” 2017). The real reason for the use of separation of controls is to reduce fraud, not errors, given the assumption that collusion is more difficult to organize between two individuals regarding a fraud, than for one person to act singularly.
References
McCrie, Robert. (2016). Security operations management (3rd ed.). Waltham, MA: Butterworth-
Heinemann.
Separation of duties. (2017). Accounting Tools. Retrieved from:
https://www.accountingtools.com/articles/what-is-separation-of-duties.html


Q1. While excessive liabilities in the form of costs are problematic, not all liabilities are equally so. Why is this? Provide an example.
Firstly, liabilities with very low interest rates are not as damaging to a business’ bottom line as liabilities with high interest rates, as noted by Accounting Coach (2018). In fact, the ability to find lower interest rate loans can be a sign of health, as most businesses are operating with some kind of debt. The reason that the liability occurred is also telling. For example, debt undertaken to expand production facilities because of an increase in demand for the company product is a sign of a healthy business, versus debt undertaken to keep the business going because of contracting demand. The phase of the company lifecycle should also be taken into consideration. When first beginning, most businesses operate at a loss, so they must take out loans. But if a mature business is still using loans to prop up its business model, this is far more worrisome.
Q2. Secondly who are Sarbanes-Oxley and what do they have to do with accounting procedures?
After a series of accounting scandals at Enron and WorldCom, there was an attempt by the United States Congress to create greater transparency in regards to accounting procedures. The Sarbanes-Oxley Act (2002), named after the two primary constructors of the bill, placed uniform regulations upon the types of internal controls and reporting methods used by companies (“Sarbanes-Oxley,” 2018). It established the IT department’s responsibility of storing certain types of records needed to reflect the company’s financial position and requirements for how long these records must be kept (“Sarbanes-Oxley,” 2018). SOX was designed to prevent the types of financial cover-ups which enabled the fraud at Enron and WorldCom to persist for so long and to ensure greater objectivity and independence of auditors evaluating financial records; it was also designed to ensure there was a paper trail that would make it more difficult for companies to conceal fraud (“Sarbanes-Oxley,” 2018).


References
Are all liabilities a bad thing? (2018). Accounting Coach. Retrieved from:
https://www.accountingcoach.com/blog/are-liabilities-bad
Sarbanes-Oxley Act of 2002 (SOX). (2018). Investopedia. Retrieved from:
https://www.investopedia.com/terms/s/sarbanesoxleyact.asp