Accounting as a profession

Discuss about the Challenges of Accounting Process of of KPMG.

Accounting is the process recording the economic transaction in the books of accounts so that financial performance of the entities can be predicted and communicated to the users of the financial statements. It is why the accounting profession is widely acknowledged as an important facet of the society. It is true that this profession has faced many challenges and still it is facing them due to change in requirement of performing the accounting process and how accounting disclosures are made so that financial reports reflects the true and fair view of the financial statements. It can be said that accounting profession is mostly influenced by the society and it also influences the society. It means the concept of influence not only benefits the practitioners or the teachers but also impacts the public governance. So it can be said that development of accounting profession and practices is ultimately related to the activities of the society. It has been seen that practice of accounting profession seen many setbacks because it does not certainly meet up the objectives due to incorporated threats and challenges. In this context this report will emphasis of the recent accounting challenges that are faced by the professional accounting bodies. The challenges occurs mainly due to change in certain accounting policies, addition of new requirements, change in disclosure requirements, and any other issue that impacts the accounting process. Accounting bodies that are actively engaged in the performing the accounting process of the companies often find it difficult to incorporate the changes that are made in the accounting standards. The International Board of Accounting Standards reserves the right to make the changes in the accounting standard as per the requirement of societies, professionals who are involved in the accounting practices, and accounting authors. Any change in the accounting standard means that certain accounting process has to be modified and altered in order to meet the requirements of the relevant accounting standards.

The main objective for developing this report is to elaborate the challenges that are faced by various accounting bodies throughout the accounting process and how they deal them. In order to understand it better it has been decided to take a case of KPMG. KPMG is the most famous professional service company and represents as one of the Big Four Auditors along with the other three companies namely Deloitte, Ernst & Young (EY), and PricewaterhouseCoopers (PwC). KPMG has recently conducted a survey on the challenges in the accounting practices and this survey is mainly based on the accounting standards that are related to the revenue recognition, and lease accounting changes. This report is based results that are gathered from the various accounting bodies that indulge in the accounting process.

Recent Changes in Accounting Standards and Impact on the Accounting Process

The main purpose of preparing this project report is to find recent changes that are made in the accounting standards and how it has impacted the accounting process. The challenges in the accounting process occur only when it is difficult to understand and incorporate the changes required by the accounting standards. This project report revolves around the main challenges that are faced due to do the modifications of two main accounting standards related to the revenue recognition and lease accounting. The report will find out what key measures that are adopted by the companies to deal with the changes in accounting process. The key is to find out the challenges that occur while implementing the new lease accounting standard and changes made by standard on revenue recognition. So the main objectives that are addressed by this report are as follows:

• It is to examine the accounting profession practices and identify the challenges or threats that hamper the development of accounting process.
• To review the major challenges those are faced while practicing the accounting profession.
• To evaluate the threats that has been suffered by the current practices of accounting profession
• To evaluate the relationship that exists between threats and challenges that slow down the development of the accounting profession (International Federation of Accountants, 2007)

The project scope is limited to the person that is involved in the accounting profession and bodies that are responsible for the changes made in the accounting standard. Here person reflect business entities, accountants, professional companies, consultants and many other that takes accounting as profession.

Accounting as a profession

In simple language, accounting profession can be regards a process or simply a profession that has a primary goal and responsibility is to determine, record, evaluate and shows the financial information in the financial reports so that users of reports can report can make use of such information. The job role of accountant professionals is much more than the process of accounting.

In the view of Ajayi (2011), accounting profession can be defined as the process of measurement and reporting of accounting information system that covers both micro and macro activities that are related to the economic events and decisions. The economic events consist of various subsystems of the accounting fields such as business accounting, social accounting, government accounting, auditing and taxation accounting. Lastly it can be said that accounting and accounting profession is included in those disciplines of human society as it is type of system of thought that has been designed by the humans to helps them in the human decision making (Ajayi, 2011).

As per Okolie & Amos (2014), accounting profession is very large process and it consists of many fields of accounting and finance. As major aim of accounting profession is to provide the qualitative financial information to the business entities that helps them to take the economic decisions. In order to provide the accounting information, accounting professionals need to fully update with the latest changes in the accounting standards and accounting principles so that correct information can be provided to the users of the financial information. As described by the KPMG in their recent report that modification in the accounting standard has made the accounting professional to face the new challenges that requires to study and implement the new technologies and system to serve the change of some particular accounting standard (Okolie & Amos,  2014).

Challenges Faced by Accounting Professionals

In the view of Dauda, Ombugadu & Aku (2015), there is major role of accounting regulators in bringing the change in the accounting standards and they also helps the accounting professionals to meet the new challenges that the particular accounting standard brings in. The main responsibility of the accounting regulators is to develop and to provide the guidelines on the preparation and reporting requirements of the financial as well as non financial matters in the books of accounts and consolidate them in the financial report. The changes made by accounting regulator bodies are to benefit the users and preparer of the financial reports (Dauda, Ombugadu & Aku, 2015).

It has been observed by the Lusher (2012), many professional bodies and non accounting organizations are jointly come together in order to assure that companies can improve the financial, social and environmental performances. Accountants have developed the ability to understand the changing requirements of the accounting and have made necessary changes to their accounting information system so that new changes can be easily incorporated without affecting the rest of accounting process. The role of accounting profession has helped the companies to fulfill the new requirements regarding the treatment of new accounting standard or modification in the existing standard (Lusher, 2012). Companies have faced major challenges in meeting the demand of change in the accounting process and have taken help to accounting professional that can lead to success in meeting the requirement of such change. Maintaining the quality reporting in the financial reports helps to improve the transparency and helps to meet the challenges that come across while adopting the changes in the accounting standards. The main role of accounting professional is to guide the companies in successfully adopting the standards and showing the path through which challenges can be successfully dealt with consistency and using innovative technology (Salmanulfarisi, 2012).

As explained by the KPMG, the accounting professionals have to face many challenges and threats that clearly impact the growth and development of the accounting profession at global level. There are many aspects in the accounting process that stop the progress of accounting development. Some of major aspects that have threatened the future development of the accounting profession have been explained below:

• Economic Conditions: This aspect is the main determinant for the development of the accounting profession in any country. There has been wide impact of economic conditions of the country on the development of the accounting profession. It is certain that as the economic condition of any county develops it bring out new challenges and threats for the accounting professionals in the form of change in accounting policies, accounting standard and corporate governance practices. Zeghal and Mhedhbi (2006) argued that in countries where the economic growth is very high the function of accountancy is considered to be very important and has to be adjusted as per the requirement of country to meet the international standards. So it can be said that economic developments comes with increase in disclosure requirements and many other functionality of accounting process (Zeghal & Mhedhbi, 2006).
• International perspectives to meet the growth in education level of accountants: The manner and way by which accountants are educated drives the ability of profession to perform and develop duties and responsibilities. So it can be said as the development of education take place new challenges will arises in the accounting profession.
• Changes in the accounting standards: The international board of accounting standard makes regular changes in the accounting standard in order to serves the demands of the various persons that are affected by the change in accounting standards. In recent period IASB has made the major changes in the accounting for leases and revenue recognition standards. These changes have created many challenges for the accounting professionals (Wyatt, 2004).

As per the view of Mowen, Hansen & Heitger (2016) the major accounting challenge faced by the business organizations worldwide is to comply with the changes in the accounting standards implemented by IASB for improving the quality of financial reporting. This is largely due to operational and financial challenges faced by many companies for adopting the new accounting standards. KPMG, a professional service company recognized as one of the biggest auditor involved in carrying out audit of multinational companies. In this context, the survey carried out by KPMG has identified that business companies worldwide are still facing the challenge for adopting the new revenue recognition standard. The effective date for implementation of the new standard by the companies is January 1, 2018 and as per the standard the companies are required to adopt the use a single principle-based accounting model for revenue recognition and disclosures (Mowen, Hansen & Heitger, 2016).

KPMG Case Study and Survey Results

The information extracted from 2017 Audit Committee Issues Conferences (2017) stated that business companies around the world are increasingly found it difficult to implement changes in their historical revenue recognition policies and meeting the requirements of the new standard. A survey conducted by KPMG in the year 2015 has ascertained that about 80& of the companies are founding large difficulty in implementing the changes in their accounting policies to comply effectively the standard expectations. The companies that is not able to make the necessary changes in their accounting system before the effective date will be forced to use manual processes for introducing new standards. The increasing reliance on manual processes by the business companies increases the risk of operational deficiencies with increases chances of error occurrence and reduced efficiency (2017 Audit Committee Issues Conferences, 2017).

As per the information obtained form KPMG’s 2016 Accounting Change Survey (2016) large number of respondents during the survey has addressed the problem of large cots involved in implementation of the changes in the accounting system to comply with the new requirements. It ahs been find out with the survey of the public companies by KPMG that large number of companies are increasingly finding its difficult to make changes in their system as per the new accounting standard. The effective adoption of the new standard requires the companies to automate their revenue processes and this requires large consumption of resource such as time and money. The implementation of the software systems requires the time-period of 9 to 12 months for adoption and the companies should work hard to design the automated systems. The companies are finding it difficult to make necessary changes in their system before implementation of the standard and also facing financial constraints to complete the different phases of such a large-scale project. Therefore, it can be said that companies are also facing increasing issues regarding the financial limitations and also reduced manpower available to implement large scale changes in their accounting system (KPMG’s 2016 Accounting Change Survey, 2016).

Mintz (2013) stated that the challenge of increased disclosure with the adoption of new standard is also the major issue faced by the companies globally. The companies whose revenue recognition is not expect to change largely also need to develop systems and processes for complying with the new requirements. It has illustrated form the survey carried out by KPMG that companies are making changes in their accounting system and policies in order to maintain comparability with their peers only. The companies are also not lacing emphasis on involving the tax professionals in the assessment phase as found out by the survey. Thus, lack of involvement of tax professionals can cause large problems for companies in the future as new rules of revenue recognition have large impact on tax areas. There is need for business companies to consider the impact of new standard on present tax compliances, taxable income, accounting method, changes for tax recognition and transfer pricing. The lack of clear direction among the business companies is causing large issues for them to make changes in their accounting system. The business companies are recommended by KPMG to adopt the use of professional project manager to obtain a clear direction for development of an effective schedule to complete the various phases in time (Mintz, 2013).

Key Measures Adopted by Companies to Deal with Accounting Standard Modifications

As per the information obtained form KPMG’s 2016 Accounting Change Survey (2016) the business companies are also facing issues related to implementation of lease accounting changes. The new leasing rules implemented by IASB are causing large changes in the reporting framework and is requiring an estimate of about $2 trillion of operate lease commitment to be reflected as liability in the corporate balance sheets. This will increase the complexity in the financial reporting process of large multinational companies as they are required to meet large difficulties in accounting for lease contracts. IASB has classified the leases as finance leases whereas FASB requires the business companies to implement tow different sets of leasing rules for accounting the lease contracts. This will cause increasingly complexity for the business companies to comply with the different rules and regulation of the different financial reporting systems (KPMG’s 2016 Accounting Change Survey, 2016).

The information gained from IFRS 16 – The new leases standard (2016) reveals that large number of survey participants as stated by the KPMG having higher operating leases need to collect relevant data about the original lease contract. Therefore, finding and collection of significant data is a challenging task for the business companies as they are not having adequate information regarding the number of leases they are holding. The companies are nit able to gain relevant information from the lease agreements due to its inconsistency and inaccuracy. The new accounting standard requires the companies to include the lease contracts such as outsourcing and service contracts that is rather difficult to be identified by them. Business organizations are not having adequate resources to collect and analyze data about their existing contracts of leases and thus require consumption of the resources of time and money (IFRS 16 – The new leases standard, 2016).

According to Mowen, Hansen & Heitger (2016) the lack of relevant systems and technologies is further adding to difficulty of the companies to track and account for its large number of leases. The lack of skilled accounting professionals to record the information of every leases contract is further adding to the difficulty of the companies to comply with the new regulatory requirements. The leasing standard is increasing the difficulty level of the companies to calculate the journal entries required for recording operating leases. In this context, the companies are facing problems relating to use of estimates and judgments in recording the financial transaction related to leases. There is increasing concern by the business companies over the impact of change sin eth balance sheet with new leasing requirements to obtain financing in future. The companies in order to address all these challenges effectively need to develop an adequate understanding of the potential operational challenges. The companies need to develop a project management team to gain assistance in performing an assessment of the needs and requirements of the project of implementing operating leases. This will help the business companies to design an effective system and process fro complying with the new leases requirements and assures timely compliance (Mowen, Hansen & Heitger, 2016).

Conclusion

It can be concluded from the overall report that business organizations are facing large challenges at present to comply with the new accounting requirements proposed by IASB. IASB is adopting the accounting standards for revenue recognition and operating eases to improve the quality of financial reporting. However, the business companies need to implement large-scale changes in their system and processes to comply with the requirements as analyzed from the findings of the KPMG Company.

References

Ajayi, C. A. (2011). The Development of Accounting Profession in Nigeria. Accounting Education in Nigeria: Challenges and Prospects. University of Lagos Press.

Audit Committee Issues Conferences. 2017. Insights from KPMG’s Audit Committee Peer Exchanges. Retrieved 27 April, 2018, from https://assets.kpmg.com/content/dam/kpmg/jm/pdf/risk-just-got-riskier.pdf

Dauda, I.A., Ombugadu, B.A, & Aku, S.U. (2015). Threats and Challenges to Accounting Profession: A Draw Back to the Development of Accounting Practices in Nigeria. International Journal of Academic Research in Accounting, Finance and Management Sciences, 5(4), pp. 96-104.

IFRS 16 – The new leases standard. 2016. IFRS 16: The leases standard is changing Are you ready? Retrieved 27 April, 2018, from https://www.pwc.com/gx/en/services/audit-assurance/assets/ifrs-16-new-leases.pdf

International Federation of Accountants. (2007). Independence: Code of Ethics for Professional Accountants. IFAC.

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Lusher, A. L. (2012). What is the Accounting Profession’s Role in Accountability of Economic, Social, and Environmental Issues? International Journal of Business and Social Science, 3(15), pp. 13-19.

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Zeghal, D., & Mhedhbi, K. (2006). An analysis of the factors affecting the adoption of international accounting standards by developing countries. The International Journal of Accounting, (41), pp. 373–386.

Mintz, S. 2013. Accounting for the Public Interest: Perspectives on Accountability, Professionalism and Role in Society. Springer Science & Business Media.