SECTION IV

Accounting. Auditing. Financial Reporting

This section contains two units including an interview, texts, exercises, modules, detailed vocabulary notes, role-play settings and an English-Russian Glossary, concerning accounting, accountancy, auditing and financial reporting in Russia and other countries.

Unit 10

Read the interview containing general information about accounting and auditing. Answer the questions following the text. Study the vocabulary notes and prepare an oral presentation in Russian, covering essential information about accounting and auditing. Pay attention to the highlighted words and expressions. The presentation is to be consecutively interpreted into English by other students. Listen to the recording of the interview and interpret it simultaneously.

Information sources: Wikipedia; “Foundation in Accounting” by Lewis, R. and Gillespie, I. (Prentice Hall); “Investors Chronicle”, A-Z of Investment by Caroline Sefton; “Management in English Language Teaching” by R.White (Cambridge University Press); “Professional English in Use, Finance” by Ian McKenzie.

Q. -Is accountancy a totally objective activity?

Is it a subject only concerned with past business and economic activity or does it have an important function for future actions?

A. - Accounting contains elements both of science and art. The important thing is that it is not merely a collection of arithmetical techniques but a set of complex processes depending on and prepared for people. The human aspect, which many people, especially accountants, forget, arises because:

1. Most accounting reports of any significance depend, to a greater or lesser extent, on people’s opinions and estimates.

2. Accounting reports are prepared in order to help people make decisions.

3. Accounting reports are based on activities which have been carried out by people.

Q. - What specifically is accounting?

A. -It is very difficult to find a pithy definition that is all-inclusive but we can say that accounting is concerned with:

The provision of information in financial terms that will help in decisions concerning resource allocation, and the preparation of reports in financial terms describing the effects of past resource allocation decisions.

Examples of resource allocation decisions are:

Should an investor buy or sell shares?

Should a bank manager lend money to a firm?

How much tax should a company pay?

Which collective farm should get the extra tractor?

As you can see, accounting is needed in any society requiring resource allocation and its usefulness is not confined to ‘capitalist’ or ‘mixed’ economies.

Q. - What is accounting mainly concerned with?

A. -An accountant is concerned with the provision and interpretation of financial information. He does not, as an accountant, make decisions. Many accountants do of course get directly involved in decision making but when they do they are performing a different function.

Accounting is also concerned with reporting on the effects of past decisions. But one should consider whether this is done for its own sake or whether it is done in order to provide information which it is hoped will prove helpful in current and future decisions. We contend that knowledge of the past is relevant only if it can be used to help in making current and future decisions, for we can hope that we shall be able to influence the future by making appropriate decisions but we cannot redo the past. Thus the measurement of past results is a subsidiary role, but because of the historical development of accounting and, perhaps, because of the limitations of the present state of the art, ‘ backward looking ’ accounting sometimes appears to be an end in itself and not as a means that will help in achieving a more fundamental objective.

Q. - What is accounts analysis? What does it include?

A. - Accounts analysis is the cornerstone of investment analysis. Investors want to know how much profit will be left to pay dividends and can the company afford to pay its bankers. It looks at what the company owns and how much money it makes to make a judgement about whether the share price reflects the value in the company by using a number of financial ratios.

Investors rely on a company’s annual report and accounts for most of the hard facts backing up their decision to buy shares. The accounts tell investors whether a company’s past record supports its promises for the future and whether it has the financial strength to put the plans into action.

All companies must publish annual results. Listed companies must publish annual results – known as preliminary results – within six months of their financial year end. They must also publish half-year or interim results.

An annual report contains a:

· Chairman’s statement;

· profit and loss account, showing whether or not the company has traded profitably over the last 12 months;

· balance sheet, giving a snapshot of the company’s assets and liabilities on one day;

· cash flow statement, showing how money has moved in and out of the business over the year.

Q. - Why and how do companies normally release results?

A. -Companies normally release results within two to three months of their year or half-year end. It is often a sign of trouble if companies take several months to publish their results. Good numbers are easier to add up, is a stock market motto. Stock Exchange rules mean companies must issue “ trading statements ” of their results hold any big surprise, but sometimes the news is even worse than investors had expected.

Q. - What does a balance sheet represent? What is the accounting equation?

A. -A balance sheet is a presentation of the state of affairs of a business in a succinct, systematic and recognizable format.

In accounting terms, this becomes:

1. Assets = Equity + Liabilities, where assets are simply what is held in the business, equity is the claim of the owners, and liabilities are the claims of third parties.

By transferring liabilities to the other side of the equation we may write:

Assets – Liabilities = Equity, or, using a technical term:

2. Net Assets = Equity

Finally we may split equity into the capital originally put into the business and reserves. Reserves represent profits which have been reserved or kept in the business. The equation now becomes:

3. Net Assets = Capital + Reserves.

Q. - How do companies choose accounting policies?

A. -Companies can choose their accounting policies – their way of doing their accounts. There are a range of methods of valuation – deciding how much something is worth – and measurement – determining how big something is – that are accepted by law or by official accounting standards. In the USA, the Generally Accepted Accounting Principles (GAAP) are used. In most of the rest of the world there are International Financial Reporting Standards (IFRS), set by the International Accounting Standards Board. These are technical rules or conventions – accepted ways of doing things that are not written down in a law.

Q. - What is the best way of defining auditing?

A. -Auditing means examining a company’s systems of control and the accuracy or exactness of its records, looking for errors or possible fraud: where the company may have deliberately given false information.

· An internal audit is carried out by a company’s own accountants or internal auditors.

· An external audit is done by independent auditors: auditors who are not employees of the company.

The external audit examines the truth and fairness of financial statements. It tries to prevent what is called “ creative accounting ”, which means recording transactions and values in a way that produces a false result – usually an artificially high profit.

There is always more than one way of presenting accounts. The accounts of British companies have to give a true and fair view of their financial situation. This means that the financial statements must give a correct and reasonable picture of the company’s current condition.

Questions:

1. What are the main purposes of accounting?

2. Is accounting completely objective or does it involve subjective judgements?

3. Do you think that accountancy is important for whatever the type of economic system a country has?

4. Why is accounts analysis important?

5. What does an annual report contain?

6. What is a balance sheet? What are the components of the accounting equation?

7. In accordance with which accounting standards and principles do companies work out their accounting principles?

8. What is auditing?