ACC618 Assignment Major Case Study 5 Vivendi Universal

Name

The University of Arizona Global Campus

ACC618: Professional Ethics for the Accountant

Professor Traci West

20th February 2023

Major Case Study 5: Vivendi Universal

When it comes to encouraging moral decision­making within a company, what part do internal controls play? Explain briefly how Vivendi’s internal controls failed it when dealing with Cegetel and Maroc Telecom. Establishing appropriate internal controls is helpful in establishing checking systems since they facilitate accurate financial transactions and accounting reporting. Accounting and financial transactions may be trusted to be honest and open if an efficient internal control system is in place. Accounting and financial reporting standards are the set of practices, regulations, and controls put in place to ensure the reliability of financial and accounting data. They encourage transparency and honesty in the workplace by limiting misconduct like wasteful spending and dishonesty.

Financial reporting is improved and accuracy is promoted when regulations and laws are followed. By assuring permission practices and efficient documentation, internal control promotes ethical behavior (Ramrez­Orellana, 2017). Reduces the likelihood of dishonesty and theft among workers. It sets up regulations to prevent a single individual from being in charge of money, documents, or authorizing crucial transactions. In addition, it ensures that only authorized persons are able to physically access any stored cash, merchandise, or equipment. Internal controls are a set of checks and balances put in place to make sure that all operations are legal and ethical.

Ethical behavior is encouraged by internal controls since they make sure one worker’s work is double­checked by another without their knowledge. The setting encourages precision and facilitates the rapid reporting of suspected concerns. They improve work flow, output, finances, and communication. The morale of the workforce is boosted, errors are reduced, and annual objectives are easier to reach as a result. When employees know that their bad actions will be uncovered and punished, they are less likely to engage in them (Ramrez­Orellana, 2017). The conditions are favorable for the growth of a productive corporate culture in which all employees work together toward a common goal. Employees whose personal goals get intertwined with those of the company tend to work harder and provide greater results.

Due to insufficient oversight of financial procedures, Vivendi’s internal controls are severely flawed. The culture promotes dishonest behavior, which costs the company dearly. As a result, mistakes can occur in the accounting system since it is not examined or checked.

Additionally, shortcomings were not fixed, leading to a host of problems (Rae, 2017). Attempts to foster a culture of accountability are undermined by the absence of an effective corrections mechanism and internal control system. The inefficiency of the system used contributed to several incidences of poor judgment.

For what reasons are full and accurate disclosures in financial accounts crucial? Can one commit disclosure fraud? Explain. The term “disclosures” refers to any supplementary data included in financial statements to shed light on the activities that led to the reported results. They assist provide important information and contain financial data that needs more explanation. Changes in the number of estimations, accounting procedures, and dependencies are just a few examples of what should be disclosed in order to ensure the credibility of financial statements. As notices and rules can affect a company’s financial statements, disclosure is required under many legal systems. Disclosing personal information is governed by rules and regulations in many nations. Annual reports are where a corporation shows its transparency and accountability to shareholders. Information can also be made public in other places outside annual reports (RamrezOrellana, 2017). Accounting policies must be made public to stockholders and shareholders in accordance with the law. Disclosures aid investors by providing them with useful information that can be used to make educated choices. As a result, they are in a better position to pick profitable markets. Some examples of accounting disclosures are profit and loss, liabilities, net sales, continuing operations, financial statement, retained earnings, changes in paid­up capital, cash flow statement, and equity in stockholders.

Omissions, misstatements, or outright fabrication of financial data all fall under the umbrella of “disclosure fraud,” which is all too widespread in the field of accounting. It results from falsified financial statements and erroneous books and records. Disclosure fraud occurs when false information is provided in legally required documents like financial statements, press releases, or other public documents (Rae, 2017). In addition, fraudulent or misleading financial data might lead to erroneous conclusions about a company’s performance, future prospects, securities, or credibility. Public shareholders can be duped by disclosure fraud, leading them to make poor investment choices. To further conceal financial information from auditors, disclosure fraud may also involve the submission of fabricated or fake documents.

Why do investors and analysts use EBITDA and operating free cash flow as metrics for performance? What is the relationship between these metrics and GAAP net income? Should accountants be accountable for verifying such details? Measures of an organization’s financial health include operating free cash flow and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for a specified time period. When taxes, interest, amortization, and depreciation are not subtracted from a company’s profits, the result is known as EBITDA. It is useful for judging the health of a company’s finances. Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a key indicator of financial health. Since it does not take into account the impact of capital and finance costs, the indicator can be used to compare and analyze the profitability of various enterprises. Considering its use in various valuation ratios, it is analogous to both revenue and enterprise value (Rae, 2017). Operating free cash flow is useful because it demonstrates financial health. Analysis of financial data is used to evaluate efficiency and make suggestions for enhancement in the business. Excel spreadsheets are commonly used for analyzing historical data in order to forecast future business performance. The cash flow statement should be one of the first metrics used to evaluate a company’s success. Free cash flow, cash flow to the company, and cash flow from operations are its three primary components.

Operational cash flow is helpful since it shows whether or not a business has enough money to cover its operating costs and debt obligations. Cash input must be greater than cash outflow for a business to be financially stable over the long term. When a company has a high operating cash flow, it means that it has more money coming in than it needs to keep running (Ramrez­Orellana, 2017). It can also shed light on why and when it’s necessary to seek outside funding.

Earnings determined by GAAP are not the same as these other metrics. GAAP earnings involve a set of agreed rules adopted to standardize financial reporting for publicly traded corporations, in contrast to EBITDA and operating free cash flow. Financial statements prepared in accordance with GAAP are uniform in structure and rules, making them accessible to creditors and investors. Due to the widespread adoption of these criteria, the risk of providing inaccurate information about a company’s operations is greatly reduced (Rae, 2017). But auditors should examine such data to make sure it has been provided accurately. Financial success may be gauged and sound investment decisions can be made with the use of all available accounting information.

Is EBITDA accounting as serious as GAAP accounting when it comes to earnings management and aggressive accounting? Explain. When it comes to providing information and guiding educated decision making, earnings management and aggressive accounting in EBITDA calculations are just as significant as those in GAAP financial statements. As they detail revenue and profit, they push management to take action when results fall short of targets (Yang & Obeysekera, 2017). Managers are urged to keep up positive results and search for ways to improve the company’s standing if it is doing well. Aggressive pricing behavior by auditors and encouragement of thorough inspection of the workplace are both outcomes of aggressive accounting and earnings management. The goal of aggressive accounting is to make a company appear more successful than it actually is by using deceptive bookkeeping practices. The goal here is to reassure traders and cut down on potential market dangers. Aggressive accounting helps paint a more favorable picture of a company’s financial health by, for example, inflating profits, hiding losses, or deferring costs (Yang & Abeysekera, 2017). As a result, it is the single most important factor in a company’s present and future financial health. Since capital expenditures are not factored into these estimates, the emphasis is on the initial profit. An investor might get a good idea of the company’s future prospects thanks to these. That means you should give them the same weight as the numbers in the GAAP financial statements.

Companies can improve their financial accounts through careful EBITDA management. By altering the books, they are able to construct income statements that appear to be completely accurate. They are meant to boost the company’s image and should be treated just as seriously as the GAAP financial statements. This method aids businesses in achieving their financial goals and avoiding disappointment (Yang & Abeysekera, 2017). To strengthen their financial statements, businesses might adjust the balance of their reserve accounts. It’s useful since it ensures a consistent operation, which in turn inspires trust in customers, vendors, and financiers.

Evaluate the provisions of Section 1103 of SOX in light of ethical considerations.

Amendments to Section 21C(c) of the Securities Exchange Act of 1934 are made in Section 1103.64 The SEC has the authority to impose a temporary escrow order under Section 1l03(a), which is only in place for 45 days until extended by the court; if charges are filed before the end of the escrow period, the freeze will remain in effect until the conclusion of the legal processes (Unger, 2006). By standardizing processes, bolstering controls, establishing robust board monitoring, and upgrading documentation, the SOX Act helps to improve financial management. It requires public firms to have strong disclosure and accountability policies in place, as well as to conduct testing of internal controls and financial statements (Ramrez­Orellana, 2017). In addition to safeguarding investors against misleading financial reporting, SOX encourages ethical thinking by making it harder for companies to engage in such practices. Criminals now face harsher punishments under the law as a result of efforts to crack down on fraud and other forms of dishonesty. In 2002, the SOX Act was passed in response to a rise in corporate bankruptcies and fraud. In order to assure the correct and complete management of financial reports, it implemented helpful regulations providing direction to auditor standards, shifting responsibilities and reducing conflict of interest.

By increasing the consequences for those who break the law, Section 1103 of the SOX Act helps to prevent the theft of company funds and other forms of fraud. Improved openness and disclosure standards, including items like off­balance sheet arrangement, are the result. The fact that SOX requires management to vouch for and check the precision of financial reporting is also a reason why it is reasonable. If a management is implicated in a case of false certification, they could face a minimum of 10 years in jail. Yet, due to SOX’s push for greater transparency, public corporations must now report both pro forma and generally accepted accounting principles (GAAP) financial results (Yang & Abeysekera, 2017). The time limit for filing an insider stock transaction disclosure with the SEC is just days (SEC). Managers and businesses that obstruct justice or commit wire, mail, or securities fraud now face stricter penalties according to new legislation.

References

Mintz, S. M., & Morris, R. E. (2020). Ethical obligations and decision making in accounting: Text and cases (5th ed.). McGraw Hill Education.

Rae, K., Sands, J., & Subramaniam, N. (2017). Associations among the five components within COSO internal control­integrated framework as the underpinning of quality corporate governance. Australasian Accounting, Business and Finance Journal, 11(1), 28­54. http://dx.doi.org/10.14453/aabfj.v11i1.4

Ramírez­Orellana, A., Martínez­Romero, M. J., & Mariño­Garrido, T. (2017). Measuring fraud and earnings management by a case of study: Evidence from an international family business. European Journal of Family Business, 7(1­2), 41­53. https://doi.org/10.1016/j.ejfb.2017.10.001

Yang, Y., & Abeysekera, I. (2019). Duration of equity overvaluation and managers’ choice to use aggressive underlying earnings disclosure and accrual­based earnings management:

Australian evidence. Journal of Contemporary Accounting & Economics, 15(2), 167­

185.https://doi.org/10.1016/j.jcae.2019.04.004