BUSI4414 ADVANCED ISSUES IN FINANCIAL REPORTING A LEVEL 4 MODULE, SPRING SEMESTER 2021-2022

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BUSI4414

A LEVEL 4 MODULE, SPRING SEMESTER 2021-2022

ADVANCED ISSUES IN FINANCIAL REPORTING

SECTION A (Compulsory Question) 

Answer ALL parts of this section

Question 1 

You are a senior advisor to an investor who is considering buying shares in Annovim Limited, a company that is listed on the London Stock Exchange. The company is operating in the hospitality industry, a sector that was significantly affected by the COVID-19 pandemic and most companies are reporting very poor results. However, despite the pandemic, Annovim has reported strong and remarkable growth in earnings in the last two years ending 31 March 2021 and 2022. It is now planning to raise additional capital by issuing shares to the public. Your client is unsure about the quality of the earnings reported by Annovim Limited and has asked you to advise if the accounts have not been manipulated. You have now asked one of your junior analysts to do some preliminary analysis and they have presented the following information using the Beneish model:

The following additional information is provided:

31 March 2022 31 March 2021 31 March 2020

£m £m £m

Sales     160,500     125,300       89,560

Gross profit       58,150       56,190       45,350

Sales, general & Admin Expenses     67,820       48,210       42,600

PPE       15,100       14,650       12,950

Total long-term debt       11,460       11,400       12,450

Accounts receivables       53,460       33,450       18,000

Required:

(a) Both earnings management and financial statement fraud involve manipulation of the accounts. Distinguish between earnings management and financial statement fraud, and discuss the implications of financial statement fraud to investors, shareholders, and other stakeholders?

(20 marks, not more than 300 words) 

(b) Using the information provided above and any additional computations you wish to make, evaluate the extent to which Annovim Limited may have manipulated its earnings for the years ended 31 March 2022 and 2021 and advise your client. Your answer must comment on each of the above variables and the M-Score as determined from the Beneish model.

(30 marks, not more than 700 words)

[Total: 50 marks]

SECTION B

Candidates must answer ONE question from this section

Question 2

A goal of the International Accounting Standards Board (IASB) is to develop an internationally acceptable set of high-quality financial reporting standards that can lead to better reflection of a firm’s economic position and performance. Barth et al (2008) argues that these standards would improve accounting (or earnings) quality if they could limit management’s opportunistic discretion in determining accounting amounts, for example, by engaging in earnings management.

You are required to:

(a) Define the concept of earnings quality and discuss, using supporting evidence, the extent to which international financial reporting standards improve earnings quality.

(25 marks, not more than 500 words)

(b) Research over the last few years has provided evidence showing that earnings management is prevalent in firms and several high-profile corporate scandals have been used to demonstrate earnings management. Using appropriate literature and case study examples, discuss any five reasons why managers are motivated to manage earnings.

(25 marks, not more than 500 words) 

[Total: 50 marks]

Question 3

“In the aftermath of the Enron bankruptcy in 2001 and the related collapse of Arthur Andersen in 2002, it has become fashionable to criticize auditing and to question the quality of audits being performed by accounting firms, especially the large international Big 4 accounting firms” (Francis, 2004, p. 346).

You are required to:

(a) Define audit quality and critically discuss four measures of audit quality that are used by accounting researchers. Your discussion must be supported by appropriate literature sources.

(30 marks, not more than 600 words)

(b) Discuss the relationship between audit quality and financial reporting quality, and the reasons why an auditor may not detect a fraud.

 (20 marks, not more than 400 words) 

[Total: 50 marks] 

Question 4

The flexibility in accounting regulation allows managers discretion to adopt accounting policy and reporting choices that serve their own interests. This presents considerable difficulties for users of accounts in understanding the underlying performance of firms when making economic decisions.

You are required to:

(a) Discuss, using relevant literature and real-life case studies, why managers may adopt different accounting policy choices to report economic activities of their firms. 

(20 marks, not more than 400 words)

(b) According to Zeff (1978), managerial discretion over accounting policy has economic consequences. Explain why.

(15 marks, not more than 300 words) 

(c) Accounting regulators and standard setters mandate a minimum level of disclosures, but firms do tend to disclose more than the mandatory information. Discuss, with supporting theoretical and empirical literature, any three reasons why companies may opt to disclose more information voluntarily. 

(15 marks, not more than 300 words)

[Total: 50 marks)