TRANSMISOR DE PRESIÓN (PIT)

The going concern assumption has contributed to the continued engagement of creative accounting. The conceptual framework puts forward the going concern concept as another underlying assumption underpinning the preparation of financial statements and is defined as,

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Seyham and Brickman, (2016: 1), “a fundamental financial statement assumption that assumes an entity will remain in business for the foreseeable future”. A business is said to be a going concern when it is able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, and objectives. The business will not have to liquidate or be forced out of business in the foreseeable future. This principle looks prudent but the problem is on the assessment of the business being a going concern. There is no laid procedure or indicators that are pointers of a business being a going concern. It is subjective and based on personal judgement of the management, preparers of the financial statements as well as the auditors. As a result, businesses have been seen as going concerns in the eyes of auditors have been seen collapsing in the short run. The issue of Enron though it took place two decades away will remain a living example of the vagueness of the measurement of the going concern aspect. Accountants have used this principle to justify unethical behaviour and end up cooking books in the name of creative accounting. Activities like revenue smoothing are being used in the accounting profession to paint a picture of continuity for a business. Accountants have used the likelihood of future profits to justify a business as a going concern. To give a sense of the possibility of future profitability accountants use tactics of income smoothing. The concept of income smoothing was discussed in detail in the earlier part of this chapter.

The conceptual framework also suggests the recognition criteria of transactions and events. This is also a key factor used by the accountants when they engage in income smoothing and in creative accounting at large. Cathrynne Service, (2017: 48) suggested that transactions and events must meet certain recognition criteria and she writes, “… when deciding whether to recognise a transaction or event, we first identify the elements and check they meet the definitions and secondly we ensure they meet the recognition criteria.” Definitions are spelled out in the accounting standards that are prepared by the IASB guided by the conceptual

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framework. Transactions and events involve elements whose definitions and recognition criteria must be met before they are recognised in the accounting records. There are five elements as identified by Koppeschaar et al, (2016: 15 – 17), namely assets, liabilities, equity, income and expenses. The recognition of elements sometimes facilitates unethical activities like creative accounting. Where the recognition criteria is not clear, the accountant is at liberty to his personal judgement, which is acceptable, and this is a source of manipulation. The accountant will always choose a position that favours a predetermined end. They can do it with constructive intent or might be guided with unconscious bias. The issue of unconscious bias was discussed in full in one of the previous chapters. Koppeschaar et al, (2016: 17) also reiterated on the manner in which to recognise the elements of financial statements when pointed out on the need of the element meeting the definition and further went on to detail the conditions of meeting the recognition criteria and they write, “to be recognised as an element in the financial statements: an item must meet the definition of one of the elements of financial statements, it should be probable the future economic benefits associated with the item will flow to or from the entity; and the item must have a cost or value that can be measured reliably.”

The recognition criteria bring in issues of personal judgement in the form of estimations and assumptions. These two variables have given the accounting profession a leeway to prey on the unsuspecting public. This has become a shelter to hide when the profession get attacked on the grounds of producing unfaithful financial statements and they use this loophole to justify their unethical behaviour when books are cooked. The assumptions and estimates come into play when establishing the probability of future economic value of the element and when trying to assign a cost or a value to the same element. The framework emphasised on the probability of future economic benefit. Probability is associated with uncertainty and assumptions must be used based on variables some of which are questionable. The ACCA

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approved study text, (2015: 13) explains that, “this must be judged on the basis of the characteristics of the entity’s environment and the evidence available when financial statements are prepared.” Judgement is subjective and can be affected by personal preferences and other factors that can impair or affect rational thinking. An accountant is a human who also has his or her self-interests and such situations where he or she is called to use personal judgement and assessment can be used for nourishing the self-interests disregarding the needs of the public and the dictates of the profession. Sometimes the personal judgement is affected by the ambiguity of the variables especially those that affect the operating environment. There is a lot of uncertainty in the operating environment that sometimes it is difficult to understand their trends and later alone making a judgement of another independent variable basing on the behaviour of that environment. The accountant is therefore at liberty to use personal creativity in making the judgements and produce financial statements that are window dressed.

After establishing the probability of future economic benefits with a lot of difficulty and subjectivity, the accountant has to make another estimate or judgement to ascertain the cost or value of the element. The framework emphasis on the reliability of measurement and, Koppeschaar et al, (2016: 17) states that, "the use of reasonable estimates is an essential part of financial statements and does not undermine their reliability". This is subject to debate because in my own opinion there is nothing like a reasonable estimate. An estimate is an estimate and subject to a lot of unclear factors. To make this worse the estimation of the value or cost is made on an element that has been decided to constitute an element in unclear and questionable circumstances. In cases where a reasonable estimate cannot be made, the framework requires that the element must not be recognised in the financial statements. Accountants can, therefore, fail to come up with a reasonable estimate and leave out the item from the financial reports if it is to their best interest. This scenario suggests that books can

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be gently cooked or even roasted with a minimum chance of contravening any principle. This is the way almost all financial statements are subjected to a certain degree of creativity in their preparation. Because the use of estimates and judgement it is almost certain that some published financial statements are not accurate and not presented faithfully because one estimate will lead to the estimation of many other elements. This was alluded by Koppeschaar et al, (2016: 17) when they write that, “because elements are interrelated, an element that is recognised, for example, as an asset, automatically requires the recognition of another element, for example, income or a liability.” There are other activities that accountants engage in a bid to make the financial statements present in a predetermined position.

The discussion in this section has been centred on the conceptual framework which is one of the pillars of the accounting discipline. The other pillar is the regulatory framework which consists of rules and regulations that were established to operationalise the conceptual framework. The next section will discuss the limitation of the rules and regulations in curbing the continuation of the creative accounting practice. This section shall also seek to establish how these rules and regulations are put in place and how they are administered.