BRANCHES OF ACCOUNTING

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STAMFORD UNIVERSITY BANGLADESH

ASSIGNMENT ON

BRANCHES OF ACCOUNTING

COURSE TITLE

Introduction to Accounting Theory

COURCE CODE

ACC 410

SUBMITTED TO:

Department of Business Administration(Accounting)

STAMFORD UNIVERSITY BANGLADESH

SUBMITTED BY:

Name ID

S A M Sharif Sheikh BBA-039-

Hasan Tanvir Mehnaz BBA-039-

Pijush Kumar Dhar BBA-039-

Noor A Salman Khan BBA-039-

DATE : -2011

BRANCHES OF ACCOUNTING

SUMMERY

SOCIAL ACCOUNTING

CREATIVE ACCOUNTING

FORENSIC ACCOUNTING

HUMAN RESOURCE ACCOUNTING

Social accounting may be defined as identification and recording of business activities regarding

social responsibility. Social responsibility concept is the one of the important concept of

management. It is the duty of enterprise to do some social activities for completing their social

responsibility.

Social accounting is very important tool to measure the performance of any company in view of

social responsibility . Company has to make social responsibility income statement and balance

sheet . But it is not compulsory to make these statements .

Forensic accounting is accounting that is suitable for legal review, offering the highest level of

assurance, and including the now generally accepted connotation of having been arrived at in a

scientific fashion. That is, forensic accounting is sufficiently thorough and complete so that an

accountant, in his/her considered independent professional judgement, can deliver a finding as to

accounts, inventories, or the presentation thereof that is of such quality that it would be

sustainable in some adversarial legal proceeding, or within some judicial or administrative

review. Findings are based upon the scientific detection and interpretation of the evidences of

phenomena introduced into the books and records of an accounting system (expansively defined)

and the effects of such phenomena upon the accounts, inventories, or the presentation thereof.

Human resource accounting is the process of identifying and measuring data about human

resource and communicating this information to the interested parties. It is an attempt to

identified and report the investment made in human resource of an organization that are currently

not accounted for in the Conventional Accounting Practice.

The adoption of the system of HRA discloses the value of human resource. This helps in proper

interpretation of Return on Capital Employed. Such information would give a long term

perspective of the business performance which would be more reliable than the return on capital

employed under the conventional system of accounting.

Creative accounting refers to accounting practices that may or may not follow the letter of the

rules of standard accounting practices but certainly deviate from the spirit of those rules. They

are characterized by excessive complication and the use of novel ways of characterizing income,

assets, or liabilities. The terms "innovative" or "aggressive" are also sometimes used. The term

creative accounting as generally understood refers to systematic misrepresentation of the true

income and assets of corporations or other organizations.

SOCIAL AOUNTING

Over the past few years the economic, political and social environment has gone through

profound changes which caused a higher level of globalization and a harsher

competition. The corporations have become stronger and stronger and one the issue of taking

responsibility was posed they have started to attach more and more importance to the corporate

social responsibility. The customers’ expectations in terms of quality products and environment

protection by manufacturers have increased. The companies now interested in both social

responsibility and ethical values promote the same customers.

The result of the consumers’ pressures to encourage the large corporations to behave

ethically and socially constructively was the concept of social accountability emerged in Great

Britain in the 70’s. Thirty years later, several small and large, private or public companies

voluntarily started to show interest in establishing their social and in elaborating a series of

documents to simply meet these requirements.

Social accounting may be defined as identification and recording of business activities regarding

social responsibility. Social responsibility concept is the one of the important concept of

management. It is the duty of enterprise to do some social activities for completing their social

responsibility.

Social accounting is very important tool to measure the performance of any company in view of

social responsibility . Company has to make social responsibility income statement and balance

sheet . But it is not compulsory to make these statements .

France , UK and USA are the top countries where social responsibility statements are made with

other financial statements . In India social accounting is not so popular but some India companies

are now focusing on social responsibility and also started to make social report for calculating to

total cost and benefits for performing social responsibility .

Objectives of social accounting

Main objectives of social accounting are to help society by providing different facilities by

enterprise and to record them. We can write them in following points

1. Effective utilization of natural resources

Main objectives of making social accounting is to determine whether company is properly utilize

their natural resources or not .

2. Help to employees

Company can help employees by providing the facility of education to children of employees,

providing transport free of cost and also providing good working environment conditions .

3. Help to society

Because companies' factories spread the pollution in natural society which is very harmful for

society .So, enterprise can help to society by planting the trees, establishing new parks near

factory area and also opening new hospitals

4. Help to customers

In social accounting this the part of benefits given by company to society , if company provides

goods to customers at lower rate and with high quality .

5. Help to investors

Company can help to investors by providing transparent accounting information to investors.

Because of many objectives are related to safeguarding of natural resources so this accounting is

also known as Social and Environmental Accounting, Corporate Social Reporting, Corporate

Social Responsibility Reporting, Non-Financial Reporting, Sustainability Accounting

EXAMPALE

Social responsibility income statement

.

Amount in $

.

Credits

.Social benefits given by co. to society

.1Opening of park expenses 100000

.2health free services 200000

.3Plantation 50000

.4water free facility 200000

.5Net balance (Cr . ) transfer from employees500000

. . .

1050000

.

Amount ( in $ )

.Social benefits given by society to co. Debits

.1Natural losses due to pollution 60000

.2Health defects 100000

.3Net balance (Dr. ) transfer from employees nil

.4other losses due to co. operations 200000

. . . .

360000

. . Net benefits given by co. to society

. credit - debit 690000

Why company involve with social accounting:

An organization may use social accounting owing to following reasons:

FFTo prove the benefits the man, the community and the environment have due to the

company’s social activities;

FFTo accurately and honestly report on all successes of the company;

FFTo prove the capital suppliers that the organization has had successes other than the one of

surviving;

FFTo prove the positive effects of work and efforts made by the personnel;

FFTo offer information, other than financial ones, so as to prove that the organization is

different from others;

FFTo help an organization efficiently supervise and manage so as to improve its performance;

FFTo acknowledge the quality standards;

FFTo motivate a more opened and honest internal and external assessment.

CREATIVE ACCOUNTING

The term ‘creative accounting’ came to prominence in a book published by Ian Griffiths in 1986.

This book, called Creative Accounting (Griffiths, 1986), written in the UK context, began with

the assertion that:

Every company in the country is fiddling its profits. Every set of accounts is based on books

which have been gently cooked or completely roasted. The figures which are fed twice a year to

the investing public have been changed in order to protect the guilty. It is the biggest con trick

since the Trojan horse.

Any accountant worth his salt will confirm that this is no wild assertion. There is no argument

over the extent and existence of this corporate contortionism, the only dispute might be over the

way in which it is described. Such phrases as ‘cooking the books’, ‘fiddling the accounts’, and

‘corporate con trick’ may raise eyebrows where they cause people to infer that there is something

illegal about this pastime. In fact, this deception is all in perfectly good taste. It is totally

legitimate – it is creative accounting.

Creative accounting refers to accounting practices that may or may not follow the letter of the

rules of standard accounting practices but certainly deviate from the spirit of those rules. They

are characterized by excessive complication and the use of novel ways of characterizing income,

assets, or liabilities. The terms "innovative" or "aggressive" are also sometimes used. The term

creative accounting as generally understood refers to systematic misrepresentation of the true

income and assets of corporations or other organizations.

"Creative accounting" is at the root of a number of accounting scandals, and many proposals for

accounting reform - usually centering on an updated analysis of capital and factors of production

that would correctly reflect how value is added.

Most organizations agree that creative accounting is bad for both the managers and investors as it

misleads them thereby allowing them to make judgments about a business based on misleading

or doctored accounting information. As a result of this accountants and business never admit that

they use creative accounting.

Why do companies involve with creative accounting?

1. A company that faces a high (and difficult to meet) security analysts' (consensus) profit

forecast:

Security analysts earn their money (in part) by advising investors (both private and institutional)

how to invest their funds. They may judge some companies to have good future prospects which

are not fully reflected in the company's share price; therefore, their recommendation will be to

buy the company's shares. Alternatively, they may judge other companies to have poor future

prospects which are not reflected in their share prices; therefore, their recommendation will be to

sell the company's shares. While security analysts carry out their own independent research into

companies they can come to different conclusions about a company's future prospects. However,

in most cases there tends to be a reasonable degree of consensus in these forecasts.

2 .A listed company's interim financial statements:

Public listed companies are required, under Stock Exchange Listing Rules to report half yearly

financial statements, as well as annual financial statements (which is of course a Companies Act

requirement). In the USA listed companies are required to report quarterly. Currently, there is no

Companies Act requirement to have these interim financial statements audited, unlike the

compulsory requirement for annual financial statements. Therefore, there is more scope for

companies to report good results in the interim financial statements knowing the statements are

not subject to the same detailed scrutiny as the yearly financial statements.

3 .A recently taken-over company:

When a company is taken over it is common practice for the existing directors to be sacked and

new directors appointed. This situation presents the new directors with a 'one-off' accounting

opportunity. That is, they may well be able to get away with reporting a loss in the financial

accounting period covering the change of management. The loss is often bigger than expected as

the results have been manipulated downwards, with the managers 'saving' profits for future years.

How can they get away with reporting such bad news? Simple, blame the poor results on the

previous managers. This well-known phenomenon is called 'big bath accounting'.

The next year will of course be a very different story, as the new managers will be fully

accountable for the company's results. Now the 'saved profits' come in very useful, as they can be

used to inflate the year's profits as proof that they are doing a fine job turning a poorly

performing company into a 'super-efficient' company.

4 .A company's directors are considering changing the status of a private company to a

public listed company:

That is, making an Initial Public Offering (IPO) of the company's shares. It is the ambition of

some private company directors to have their company's shares successfully floated on the Stock

Exchange. In order for the shares to be attractive to potential investors, it is useful to have a good

track record of steadily increasing profits, in order to give the impression that this trend will

continue into the future. How is this record of steadily increasing profits achieved? Well, one

way is to manipulate the results. That is, if the company experiences a poor year its results are

manipulated upwards, while in a good year the results are manipulated downwards (saving

profits for future poor years).

5. A large regulated utility company:

Many large companies, particularly regulated utility companies, have a high political profile.

Their actions such as raising prices to customers and reporting high increased profits are seen,

particularly by the media (press and TV), as an exploitation of their powerful, often monopoly

position. Also, politicians are on the lookout for 'public interest' cases to champion, to show they

are representing the electorate. For example, the British Labor Party came to power on a

platform of a 'windfall' tax on privatized utility companies. Such companies have an incentive to

report lower rather than higher profits to keep out of the political spot-light.

6 .The economy is moving into recession:

When the economy is moving into recession, it is likely that most companies are reporting

reductions in profit. Therefore, any manipulation may well be in the upward direction in order

for the results to be more favorably compared with those of the previous year. It is also common

practice for Chairman and Managing Directors to blame their company's poor performance on

the state of the economy.

7. A company whose trade unions are about to submit a large wage demand.

The employee’s representatives are likely to have done their homework prior to submitting a

wage demand. A key question is always 'how much can the company afford to pay?' This will

involve a thorough analysis of the company's financial statements and in particular the state of

the company's profits. Surely the larger the profits, the more the company can afford to pay?

Therefore, company directors have an incentive to report lower rather than higher profits.

8 .There is a strong rumour that a public company might be subject to a hostile take-over

bid:

Directors' of public companies live in fear of a hostile or unfriendly take-over bid. If the bid is

successful then the existing directors are likely to soon be out of a job. One of the many defenses

available to the directors to prevent the bid arising is to impress their shareholders with 'healthy

looking' financial statements. This may mean reporting a higher than deserved profit figure.

9. A company performing below its industry average:

If a company is under-performing compared with other companies in its industry, there will be

incentives for its directors to use aggressive (i.e., profit increasing) accounting policies.

However, there are considerable pressures from security analysts for companies in the same

industry to use similar accounting policies. If a company uses aggressive accounting policies this

is likely to lead to bad press and selling of the company's shares.

10. A company's directors are on a profit related bonus scheme:

At first sight the incentives appear obvious; that is, the higher the profit the greater the directors'

bonus, so the answer is (a).

However, bonus schemes in the real world are rarely as straightforward as just described. Bonus

schemes often have a lower qualifying level and an upper ceiling. Any profits reported below the

qualifying level (say £1 million) earns the directors no bonus at all, as this is seen as a poor

performance which is not worthy of reward. Reported profits in excess of the ceiling (say £10

million) attract no further bonus as this is seen as excessive reward which may well result from

creative accounting.

.

11. A company that is in fairly permanent decline:

Directors of companies that are in permanent decline can get quite desperate and be tempted to

manipulate profits to a greater and greater extent each year. However, there is only so much

manipulation that can be carried out within the law and eventually the only way of covering up

poor results is to resort to fraud. You are no doubt familiar with some recent financial scandals

where apparently healthy companies suddenly collapsed. It is doubtful whether their last few

years' financial statements showed a 'true and fair' picture.

12. A company has borrowed heavily and is highly geared:

When a company borrows money from financial institutions they are frequently forced to agree

to a number of restrictive measures contained in a legally enforceable contract called a 'debt

covenant'. One such measure is an upper level for the company's gearing ratio as measured by

dividing debt by shareholders' funds. If a company is close to this upper level then its directors

have an incentive to use accounting manipulation to either reduce its debt or increase its reported

shareholders' funds.

13. A company operates in an industry known for highly volatile profits:

Such companies are likely to use profit manipulation to 'smooth-out' their profit trends, on the

basis that the greater the variation in reported profits, the greater will be their perceived risk and

the lower their share price. So, if the company's underlying performance is poor it is likely to use

profit increasing manipulations, while if underlying performance is good the company is likely to

use profit reducing manipulations.

14 .A companies are faced with severe foreign competition:

Such a company may well look to its government to help it out, by imposing restrictions upon

the number and/or quality of foreign imports. The government will need to be satisfied that the

company is indeed struggling to survive, therefore, the reporting of lower rather than higher

profits will strengthen the company's case for Government assistance.

15 .The directors of one of a group's non-core divisions are planning a 'buy-out':

While the group will want to sell the non-core division so that it can concentrate upon its core

activities, it will want to obtain the highest possible price for the division.

However, the directors of the division will want to pay the lowest possible price. As it is these

divisional directors who are responsible for preparing the division's financial statements, they

clearly have an incentive to manipulate the reported divisional profit down-wards in the years

preceding the buy-out, as it is these profit figures that will be used to determine the buy-out

price.

16. A company is looking to reduce its tax bill:

As the amount of taxation a company pays is to some extent based upon the reported profit

figure, the incentive is to manipulate profit downwards.

NEED OF CREATIVE ACCOUNTING

Need of creative accounting have focused mainly on the impact on decision of investors in the

stock market. Reasons for the directors of listed companies to seek to manipulate the accounts

are as follows.

(1) Income smoothing. Companies generally prefer to report a steady trend of growth in

profit rather than to show volatile profits with a series of dramatic rises and falls. This is

achieved by making unnecessarily high provisions for liabilities and against asset values

in good years so that these provisions can be reduced, thereby improving reported profits,

in bad years. Advocates of this approach argue that it is a measure against the 'short-

termism' of judging an investment on the basis of the yields achieved in the immediate

following years. It also avoids raising expectations so high in good years that the

company is unable to deliver what is required subsequently. Against this is argued that:

· If the trading conditions of a business are in fact volatile then investors have a right to know

this;

· Income smoothing may conceal long-term changes in the profit trend.

This type of creative accounting is not special to the UK. In countries with highly conservative

accounting systems the 'income smoothing' effect can be particularly pronounced because of the

high level of provisions that accumulate. Blake et al. (1995) discuss a German example.

Another bias that sometimes arises is called 'big bath' accounting, where a company making a

bad loss seeks to maximize the reported loss in that year so that future years will appear better.

(2) A variant on income smoothing is to manipulate profit to tie in to forecasts. Fox (1997)

reports on how accounting policies at Microsoft are designed, within the normal

accounting rules, to match reported earnings to profit forecasts. When Microsoft sell

software a large part of the profit is deferred to future years to cover potential upgrade

and customer support costs. This perfectly respectable, and highly conservative,

accounting policy means that future earnings are easy to predict.

(3) Company directors may keep an income-boosting accounting policy change in hand to

distract attention from unwelcome news. Collingwood (1991) reports on how a change in

accounting method boosted K-Mart's quarterly profit figure by some $160 million, by a

happy coincidence distracting attention from the company slipping back from being the

largest retailer in the USA to the number two slot.

(4) Creative accounting may help maintain or boost the share price both by reducing the

apparent levels of borrowing, so making the company appear subject to less risk, and by

creating the appearance of a good profit trend. This helps the company to raise capital

from new share issues, offer their own shares in takeover bids, and resist takeover by

other companies.

(5) If the directors engage in 'insider dealing' in their company's shares they can use creative

accounting to delay the release of information for the market, thereby enhancing their

opportunity to benefit from inside knowledge.

It should be noted that, in an efficient market, analysts will not be fooled by cosmetic accounting

charges. Indeed, the alert analyst will see income-boosting accounting changes as a possible

indicator of weakness. Dharan and Lev (1993) report on a study showing poor share price

performance in the years following income increasing accounting changes. Another set of

reasons for creative accounting, which applies to all companies, arises because comp flies are

subject to various forms of contractual rights, obligations and constraints based on the amounts

reported in the accounts. Examples of such contractual issues are as follows.

Example 1 It is common for loan agreements to include a restriction on the total amount that a

company is entitled to borrow computed as a multiple of the total share capital and reserves.

Where a company has borrowings that are near this limit there is an incentive to:

· choose accounting methods that increase reported profit and consequently the reserves.

(Sweeney (1994) reports that companies nearing violation of debt covenants are two to three

times more likely to make income increasing accounting policy changes than other companies);

· arrange finance in a way that will not be reflected as a liability on the balance sheet.

An accounting rule change can plunge a company into difficulties with loan agreements. Thus in

the USA, when the FASB introduced a rule requiring that income from extended warranties must

be allocated over the life of the warranty rather than being recognized at the time of sale,

consumer electronics retailers were badly hit:

The biggest problem could be with the banks that keep a close eye on debt to equity ratios so

stores that borrowed heavily to build inventory and finance expansion could end up in technical

violation of bank lending agreements pegged to certain ratios. (Therrien 1991:42)

Example 2 Some companies, such as public utilities like electricity and telephone companies, are

subject to the authority of a government regulator who prescribes the maximum amounts they

can charge. If such companies report high profits then the regulator is likely to respond by

curbing prices. These companies, therefore, have an interest in choosing accounting methods that

tend to reduce their reported profits.

Example 3 A directors' bonus scheme may be linked to profits or to the company share price.

Where the link is to the share price then clearly the directors will be motivated to present

accounts that will impress the stock market. Where a bonus is based on reported profit the

scheme often stipulates that the bonus is a percentage of profit above a minimum level, and is

paid up to a maximum level.

Thus:

1. If the profit figure is between the two levels then directors will choose accounting methods

that lift profit towards the maximum.

2 .If the profit is below the minimum level directors will choose accounting methods that

maximize provisions made so that in future years these provisions can be written back to boost

profit.

3. Similarly if the profit is above the maximum level directors will seek to bring the figure down

to that level so that the profit can be boosted in later years.

The timing of the announcement of gains and losses can have a major impact on bonuses. In

January 1991 Westinghouse announced unaudited record earnings of $1 billion and related hefty

bonuses; in February 1991 bad debt write-offs of $975 million were announced, putting the

legitimacy of bonuses in question (Schroeder and Spiro 1992).

Example 4 Where a part or division of a business is subject to a profit-sharing arrangement then

this may affect the preferred accounting methods. In the UK, for example, we know of a local

council that had a contract with a company for the company to manage the council's leisure

center. The contract provided for profits to be shared equally between the two parties.

At the end of one year; not surprisingly the company's accountants said the center had made a

loss and the council's accountants said it had made a profit. The problem was solved by an

agreement for the company to pay a fixed amount of money each year instead of a profit share.

In the USA film companies have been notorious for claiming massive expenses against

successful films so that writers, producers, and actors on 'net profit' deals receive little or no

remuneration (Grover 199 la).

Example 5 Taxation may also be a factor in creative accounting in those circumstances where

taxable income is measured by relation to the accounting figures.

Example 6 When a new manager takes over responsibility for a unit there is a motivation to

make provisions that ensure that any losses appear as the responsibility of the previous manager.

Dahi (1996) reports on a survey of US bank managers that found provisions for loan losses

tended to be higher in the year of change in manager.

HUMAN RESOURCE ACCOUNTING

“HRA is the human resources identification and measuring process and also its communication

to the interested parties.” - American Accounting Association

Human Resource Accounting (HRA) involves accounting for the company’s management and

employees as human capital that provides future benefits. In the HRA approach, expenditures

related to human resources are reported as assets on the balance sheet as opposed to the

traditional accounting approach which treats costs related to a company’s human resources as

expenses on the income statement that reduce profit. HRA suggests that in addition to the

measures themselves, the process of measurement has relevance in decision-making involving

organizations. Although the origins and early development of HRA occurred mostly in the

United States, interest and contributions to growth in the field have been evident in a number of

other countries. This paper provides a brief overview of HRA from an international perspective.

The subject of offering measures of the values of people to the organization through human

resource accounting is an essential component of HRP at all levels. According to Flamholtz and

Lace(1981):

"Human Resource Accounting may be defined asthe measurement and reporting of the cost and

value of people as organizational resources. It involves accounting for investment in people and

their replacement costs, as well as accounting for the economic values of people to an

organization."

In recent years, the financial reporting standards used in the United States, often referred

to as Generally Accepted Accounting Principles (GAAP), have been moving toward adoption of

more complex measurement methods compared with the traditional historical cost approach to

asset measurement. The strong growth of international financial reporting standards (IFRS) is

another indication that the environment for financial accounting reporting is one that potentially

encourages the consideration of alternative measurement and reporting standards. Accountants

and others in the financial reporting environment have become accustomed to using more

complex measurement approaches to the financial statement reported amounts. This would lend

support to the possibility that future financial reports may include nontraditional measurements

such as the value of human resources using HRA methods.

Research during the early stages of development of HRA was conducted at the University of

Michigan by a research team including the late organizational psychologist RensisLikert, founder

of the University of Michigan Institute of Social Research and well known for his work on

management styles and management theory (Likert, 1961, 1967), faculty member R.

LeeBrummet, and then Ph.D. candidates William C. Pyle and Eric Flamholtz. The group worked

on a series of research projects designed to develop concepts and methods of accounting for

human resources. One outcome of this research ( Brummet, Flamholtz& Pyle, 1968a) was a

paper representing one of the earliest studies dealing with human resource measurement-- and

the one

in which the term “Human Resource Accounting” was used for the first time. Brummet,

Flamholtz& Pyle (1968b) also published another article in which they assessed the impact that

HRA can have on management. Flamholtz’s (1969) Ph.D. dissertation, an exploratory study in

the area of HRA, developed a theory of an individual’s value to an organization and how it could

be measured though HRA. Brummet, Flamholtz& Pyle (1969) focused on HRA as a tool for

increasing managerial effectiveness in the acquisition, development, allocation, maintenance,

and utilization of its human resources. The authors’ work represented one of the first attempts to

develop a system of accounting for a firm’s investments and studied the application of HRA in

R.G. Barry Company, a public entrepreneurial firm. The early work in HRA provided inspiration

for the next phase of early HRA development, basic academic research developing measurement

models. Interest in HRA was evident in the many studies conducted since its inception, as noted

in Sackmann, Flamholtz&Journal of International Business and Cultural Studies Human

Resource Accounting, Page 3Bullen (1989), Flamholtz, Bullen&Hua (2002), and

Flamholtz,Kannan-Narasimhan&Bullen(2004.)

Why company involve with human resource accounting:

When a firm invests in human resources by acquisition and training, it anticipates a future

generation of profits and services that will be produced by these assets. The techniques showing

a greater capacity to stimulate efficiency is based on the idea that an employee who is induced to

get to know his job better is more productive and quicker on the job.

Training in firms is an activity that develops the worker’s capacity to improve efficiency and job

quality, therefore, the enterprise increases its profitability. The training concept is generally used

to define three different issues, which, in practice, are difficult to distinguish: capacitation,

training, and development (Guzman et al.,)

Capacitation is the worker’s acquisition of knowledge and skills necessary for his job. Training

better adapts the worker to the job, and development focuses on promotion to higher job levels.

Even though there are different training classifications, the one proposed by Marques reports

several criteria:

1. When does training take place?

It can be at the contracting moment or any moment during employment.

2. How long is the training period?

It can take from one or two days to one or two weeks. In some cases, it can take six months, one

year, or more.

3. Does this training relate to the nature of the job by updating an employee’s knowledge and

teaching new techniques or does it open doors to new skills not related to the worker’s

professional activity?

4. Is there internal or external training taking place?

Creative training comes from the firm’s planning process and makes personnel capable of doing

their job. On the contrary, competitive strategic training maintains the firm’s competitive level.

Inside creative training, three different actions can be distinguished that will incur some

expenses. Those training expenses are related to jobs and profession evolution, improvements in

global services, and innovation or change in projects. In any case, expenses derived from

creative training are considered long term because they increase the firm’s added value. In other

words, with creative training, the firm becomes more competitive and increases its income.

Expenses derived from competitive strategic training will be considered as current expenses

since they appear as a consequence of short-term actions that maintain the firm’s competitive

level, even though its absence may lead to a decrease in the employee’s qualifications. The

following are the different methods of human resources measurement and accounting.

1. Treatment from a Financial Accounting Perspective:

Following the definitions already explained, as long as future benefits are expected to come from

these training costs, they can be treated as assets. However, this does not hold true in reality. As

CeaGarcía states: “There is a clear absence of correspondence between the real assets in the

present firms and those recognized in the balance sheet... In fact, assets are too related to its

juridical conception (that is, owned by the firm...), in front of a pure economic approach where

asset is every instrument or way that can be used in the production-distribution firm’s process or,

in general, every category of economic value which can be transformed into goods or services or

any instrument at the service of the firm or that the firm uses, regardless of its juridical state...and

also all those goods and rights that the firm does not own now but used to own or will own later

on, by virtue of collateral contractor agreements which may induce it. ”So, a diagnosis is reached

about the predominant asset concept. This situation can be explained by two important problems

that are met when referring to intangibles: Identify the asset’s cost and estimate the period in

which the asset should be amortized

2. Treatment from a Managerial Accounting Perspective:

Personnel working for a determined enterprise are actually participating in a value-creation

process. That is, any economic activity makes the firm incur costs. One traditional classification

takes into account the cost categories of raw materials, industrial plants, and personnel. When

adding income flow to an organization’s market goods and services, if it is superior to the cost

flow, it becomes added value. This value is a con of the interaction between material and human

resources in production. Because it is difficult to know and measure value, accounting has used

substituted measures such as acquisition cost, substitution cost, and even opportunity cost.

i) Acquisition Costs and Learning Costs: - It represents the original cost of human

resources in the conventional accounting sense, and includes such costs as personnel

recruitment, training, and development. Under this method, the cost of acquisition i.e.

selection, hiring, training costs of employees are capitalized and written off over the

expected useful life of the employees.

ii) Substitution Costs: The mental exercise necessary to rebuild an organization is an

excellent way to attract attention to human resources, which is now seen in a new

light. Certainly, Professor Likert’s fiction includes the implicit posing of human

resource valuation under substitution (or replacement) cost criteria. Even though

Likert’s proposal is very unlikely, it enables calculating the cost of totally substituting

(or replacing) human resources. To calculate substitution cost, figure in the cost of

sacrifice to replace a human resource that is already employed. This cost includes exit

costs of the leaving employee and recruiting and training of the replacement

iii) Opportunity Costs: Some authors consider that opportunity costs are not the

alternative to historical costs or substitution costs, but estimates these costs without

mistake. Opportunity costs are considered as “an asset value when [they are] the

target of an alternative use”(Hekimian and Jones).Cost valuation is based upon the

conflict of interest that can take place in a firm’s internal, fictitious market where

several organizational units (divisions) participate.These units must be profit centers,

that is, their objectives must be expressed in terms of profitability

iv) Replacement Cost: It is a current money measure of the expenditure required for a

business entity to replace its existing investment inhuman resources. Under this

method, the human resources are valued at their replacement cost i.e. the monetary

implications of replacing existing personnel. Replacement costs could be positional

i.e. replacing personnel for particular positions or personal i.e. replacing specific

talent or ability of particular persons.

v) Economic value models: Economic value refers to the appropriately discounted

amount of net cash inflows generated by the human resources of a firm over their

economic service lives. Some authors refer to the economic value method as the

present value measuring technique or use the term in conjunction with the opportunity

cost approach.

vi) Standard Cost Method: Under this method, standard costs of recruiting, hiring,

training, and developing per grade of employees are determined annually. The total

standard cost for all personnel of the company is the value of human resources.

vii) Competitive Bidding Method: This approach suggests competitive bidding for

scarce employees in an organization i.e. Opportunity cost of employees linked to

scarcity. The approach proposes the capitalizing of additional earning potential of

each human resource within the company.

viii) Non-monetary Measures: Non-monetary measures of human resources may refer to

simple inventory of skills and capabilities of people within an organization; to a list of

professional credentials of key personnel within an organization; or to the application

of some non-monetary behavioral measurement technique for assess assessment of

the contributions of various individuals or groups to an entity.The non-monetary

behavioral approach appears to have substantial promise for successfully measuring

all elements of the employee’s total value to an entity. Although reasonable progress

has been made in measuring the individual’s value to a firm using either the historical

or replacement cost technique, neither of these latter methods currently reflects the

group and organizational dimensions of an individual’s total value.

Need for Human Resource Accounting:

One of the major objectives or need of human resource accounting is to develop reliable

measures of effective manpower utilization. Both monetary and non-monetary measures are

needed for use in (1) decision making involving the acquisition, development and allocation of

human resources, and (2) monitoring and evaluating the degree to which the management has

effectively and efficiently utilized the human resources. For further conceptual clarity, one may

look at some of the terms used in the context of human resource value with their simple

definitions:

1) Value: The present worth of the services of an employee is anticipated to render in I the

future.

2) Value of human organization: The present worth of its expected future services to an

enterprise.

31 Individual's value to an organization: The present worth of the set of future

4) Group’s value to an organization: The present value of its expected future services.

Membership during the period of his or her productive service life.

7) Productivity: The set of services an individual is expected to provide while occupying his or

her present position.

8) Promo ability: The set of services the individual is expected to provide if and when he or she

occupies higher-level positions in his or her present or different promotion channels.

9) Individual skills: The currently developed potential of an individual to provide services to the

organization;

10)Rewards: The benefits derived by the system.

11)Instrumental individual rewards: Rewards which are administered in relation to individual

effort.

12)Instrumental system rewards: Rewards which accrue by virtue of membership in the

system.

13) Activation level: The neuropsychological counterpart of the notion of motivation.

14)Human resource valuation: The process of assessing the value of people to a Resource

Development organization. It involves measuring the productivity and promo ability of people.

15)Casual variables: Independent variables that can be directly or purposely altered by the

organization and its management.

16) Goal emphasis: Behavior that stimulates an enthusiasm for meeting the group's goal or

achieving excellent performance.

17) Intervening variables: Variables that reflect the internal state, health and performance

capabilities of an organization.

18) Managerial behavior: The dimensions of supervisory behavior effecting influencing group

effectiveness.

19)Organization structure: The structural relationship among organization roles.

20)Peer group behavior: The support, interaction, facilitation, work facilitation, and goal

emphasis provided by the subordinate peer group.

21)Support: Behaviors that enhances someone else's feeling of personal worth and importance.

22)Team Building: behavior that encourages members of the group to develop close, mutually

satisfying relationship.

23)Work facilitation: behavior that helps achieve goal attainment.

24)End-result variables: Dependent variables that reflect the results achieved by an

organization.

FORENSIC ACCOUNTING

Simply put, forensic accounting is accounting that is suitable for legal review, offering the

highest level of assurance, and including the now generally accepted connotation of having been

arrived at in a scientific fashion. That is, forensic accounting is sufficiently thorough and

complete so that an accountant, in his/her considered independent professional judgement, can

deliver a finding as to accounts, inventories, or the presentation thereof that is of such quality

that it would be sustainable in some adversarial legal proceeding, or within some judicial or

administrative review. Findings are based upon the scientific detection and interpretation of the

evidences of phenomena introduced into the books and records of an accounting system

(expansively defined) and the effects of such phenomena upon the accounts, inventories, or the

presentation thereof. (Alternatively, if there is no impact on an accounting system, there is no

accounting evidence, nor is there any effect upon the accounts, inventories, or the presentation

thereof; and such situations are not within the realm of forensic accounting.) The primary

orientation of forensic accounting is explanatory analysis (cause & effect) of phenomena -

including the discovery of deception (if any), and its effects - introduced into an accounting

system domain. The primary methodology employed by forensic accountants is objective

verification.

Since all professional accountants operate within a commercial legal environment, all

professional accountants are, in a sense, forensic accountants. What distinguishes forensic

accounting in common parlance, however, are the engagements. That is, when a professional

accountant accepts an engagement where they anticipate that their finding or analysis may be

subject to adversarial or judicial scrutiny or administrative review, the professional accountant

seeks a level of evidentiary detail and analytical precision which will be sustainable within the

legal framework of such scrutiny or review. This approach is based on no more than the realistic

appreciation that, while there is some evolutionary dialogue, in the end, the courts or appropriate

administrative bodies are the ultimate arbiters of what accounting facts are.

Forensic accounting is focused, therefore, upon both the evidence of economic

transactions and reporting as contained within an accounting system, and the legal framework

which allows such evidence to be suitable to the purpose(s) of establishing accountability and/or

valuation. Forensic accountants are typically CPA/CAs that specialize in those types of

engagements where there is a need for such evidence. Engagements are wide-ranging, and

include transaction reconstruction and measurement; bankruptcy, matrimonial divorce, and

probate asset identification and valuation; falsifications and manipulations of accounts or

inventories or in the presentation thereof; and accountability within the statutory audit and other

environments; among many others. Increasingly, as various parties perceive the value of such

evidence, grounded as it is in "accounting facts," forensic accountants are called upon to play

important peremptive roles (as of right, without cause), offering independent assurance in such

diverse areas as audit committee advisory services, merger and underwriting due diligence,

investment analyst research, and enterprise risk management. The validation and enhancement of

the body of knowledge (the models and methodologies) relating to the evidentiary value of

accounting data, within a strict legal framework.

ADVANTAGES OF FORENSIC ACCOUNTING

Forensic accountants detect and interpret the evidences of both normal (no fraudulent)

and abnormal (fraudulent) phenomena introduced into the books and records of an accounting

system (expansively defined) and the resultant effect upon the accounts, inventories, and the

presentation thereof. It is imperative, therefore, that forensic accountants first understand what is

normal, since even extremely high value abnormalities are introduced by such simple

mechanisms as improper account classification or the presentation policy of routine transactions.

Therefore, just as forensic dentists and forensic anthropologists are dentists or anthropologists

first (that is, they are foremost professionals in the underlying discipline and are specialists in its

forensic aspects), so too forensic accountants are accountants first. Students not desirous of a

professional accounting orientation might wish to pursue careers as financial investigators or

analysts; fields in which cross-fertilization of ideas and engagement teaming naturally arise.

Students in the United States desiring a career as a professional accountant specializing in

forensic engagements might wish to consider first obtaining their CPA. CPAs have a social

obligation which transcends the client-accountant relationship. The strictures of AICPA

standards notwithstanding, the specialization of forensic accounting is rapidly evolving to

demand a standard of professionalism that begins with the social obligation of CPAs, but goes

farther in demanding independent, objective (bias-free) analysis and reporting of economic

transactions.

In addition, certain SEC Rules, including some related to the Sarbanes-Oxley Act,

provide CPAs with a powerful tool which makes it unlawful for large portions of a subject

population to mislead "any independent public or certified public accountant" in a variety of

engagement situations. Many states have passed mirror legislation that provides an equivalent

tool to CPAs in a variety of non-public company engagements.

Moreover, CPAs are uniquely qualified to tackle fraudulent financial reporting by

executive management in public companies, the magnitude of which typically dwarfs employee

or external fraud.

Lastly, most states provide a licensing exception for CPA's who perform investigative

tasks commonly undertaken by forensic accountants. Without this exception, performance of

many of these investigative tasks would require a situationally-limited exemption (e.g., in some

states working as an employee and focused exclusively on the affairs of the employer - such as

an internal auditor), a Private Investigator's license, or be prohibited altogether. Public-sector

financial investigators are generally excluded from licensing requirements.