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Succeeding in any field of study requires the use of a solid strategy and accounting is no exception. As an undergraduate student in accounting, I many times had classmates in my accounting courses that would vent to me their frustration with their inability to consistently achieve above average exam grades. In response, I would ask them their strategy for studying for the course. In 9 out 10 cases, they had no clearly defined strategy and that's exactly what I call a recipe for failure. Successful studies in the field of accounting require a structured approach. While I never did exceptionally well in college, I was however able to do better than average in all my accounting classes because I developed and adopted effective learning habits very early on. Before going any further, I would like to mention that the study skills I am about to share with the whole world are not a one size fits all. You are thereby invited to tweak them for the purpose of achieving optimum results. With the disclaimer out of the way, let's take a look together at the study habits that enabled me to fare better than most throughout each of my accounting classes. These learning habits were stacked up in four chronological phases: before the lecture, during the lecture, after the lecture, and before the test.
- Before the lecture: Before showing up for every lecture, there were two things that I would do. First, I would read the assigned chapter's opening story. Reading the opening story was very helpful to me because it enabled me to get a good feel for the issues to be discussed throughout the lecture. The other activity that I completed as part of preparing for the lecture was to print out then read the assigned chapter's powerpoint slides hosted on the textbook's website. If any worked problem was included in the slides, I would make every effort to solve it without looking at the solution. By the time I was finished working with the slides, I had become well acquainted with most of the topics to be covered in the lecture.
- During the lecture: I always made sure to show up for the lecture on time and equipped with the chapter's powerpoint slides, the textbook, a basic scientific calculator, a notebook, etc. As I listened to the lecture, I would write anything that the instructor mentioned that was not included in the notes. If the professor singled out topics or types of problems that were highly likely to appear in the exam, I would also write that down. Last but not least, I made every effort to ask questions whenever I felt confused and I could not find the answers in the textbook.
- After the lecture: My first year in college, I had a bad habit of not reviewing my class notes nor completing any additional reading in a timely manner. That strategy seemed to work well until the semester of my Intermediate Accounting I course. The instructor was going through the chapters so fast that my procrastination ended up becoming a serious liability. It didn't take me too long to realize that a change of strategy was badly needed. It is right then that I decided that I was going to strive as much as possible to review my class notes and complete any further reading within 36 hours of the completion of a class session. Additionally, I committed to working out all chapter assigned problems over the weekend. These small adjustments in my study habits turned out to be very instrumental in helping me turn the semester around after I got off to a bad start in my Intermediate I accounting course.
- Before the exam: Once I became accustomed to consistently completing phases 1 through 3, my exam preparation became less tedious. Obviously I still needed to do things like review my class notes, read over the powerpoint slides, and rework some of the assigned problems with higher difficulty levels. I also did put a special emphasis on knowing how to solve every problem worked in class and in the textbook. This is because, from personal experience, in almost 85% percent of the cases, the tests questions will be modeled after the lecture's and or textbook's solved illustrations or problems. To complete my preparation for the exam, I would go on the textbook's website take a quiz and a true or false questionnaire for each of the chapters I was going to be tested on. Not only did this final step help me hone in my exam taking skills, but it did also assist me in assessing my level of readiness for the exam I was about to give.
These guidelines are not meant to apply to very student's situation because learning styles vary from one individual to the other. Nonetheless, any person is welcomed to adapt the study habits I just outlined to her own set of circumstances. If you find yourself reading this post, please take a few minutes to contribute to the discussion by sharing some of the study techniques that worked or are working for you in your accounting courses or in your other business classes.
Tags: Accrual Accounting, Earnings Management, FASB Satement, Financial Reporting, IFRS, Materiality, Restructuring Charges, Revenue Recognition, SAB, SEC, SFAS | Category: Audit and Assurance, Financial Accounting, Management Accounting |  As I explained in my previous post, accrual accounting is not an exact science. Indeed, a variety of assumptions and accounting estimates is used in arriving at the final earnings figures. In assessing the health of a company, lenders and investors alike almost always look at the quality of its earnings first. However, it is nearly impossible for a company to consistently report stellar periodical earnings over a long period of time. This is because a company's business activities can be affected by changes in economic cycles, seasonal changes, new legislation, and other extraordinary events. In order to "normalize" the continuous succession of ebbs and flows in financial results characteristic of any typical business, company managers, more often than not, resort to a practice known as earnings management. According to Healy and Wahlen (A review of the earnings management literature and its implications for standard setting', Accounting Horizons, December 1999, pp. 365–383.), "earnings management" occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of a company or influence contractual outcomes that depend on reported accounting numbers. In other words, earnings numbers are deliberately manipulated by management for the purpose of meeting company's objectives whatever they might be. There are about three types of companies that are likely to adopt an earnings management policy: companies where executive compensation is tied to earnings, publicly traded companies because they are under constant pressure to meet or beat analysts earnings forecasts, and companies getting ready for major debt financing or for an IPO (Initial Public Offering). Contrary to what you may think, most earnings management techniques are often within the boundaries of Generally Accepted Accounting Principles (GAAP). Indeed, all it takes is a well trained accountant that understands how changes in accounting judgments and estimates can be used to upwardly or downwardly affect earnings. In his remarks entitled "The Numbers Game" made on September 28, 1998 at the New York University Center for Law and Business, then-SEC (Securities and Exchange Commission) Chairman Arthur Levitt described five techniques of "accounting hocus-pocus" that summarized the most glaring abuses of the flexibility inherent to accrual accounting: big bath charges, creative acquisition accounting, cookie jar reserves, materiality, and revenue recognition.
- Big Bath Charges: this is when a company resorts to taking a one time huge restructuring charge/write down as opposed to appropriately recording the losses over several fiscal years. This is to avoid a succession of years of earnings decline that would have otherwise made the company financial health look bad in the eyes of stakeholders. To make it more difficult for companies to abuse of "big bath charges", in 1998, the FASB adopted SFAS No. 144 on impairment losses and SFAS No. 146 on the timing of the recognition of restructuring obligations.
- Creative Acquisition Accounting: This is when following a business acquisition, the acquirer allocate the bulk of the total purchase price to the acquiree's in-process Research & Development as opposed to its long lived assets, thus recording a huge expense during the year of acquisition as mandated by US GAAP. Since 1998 however, SFAS Nos. 141 and 142 have been adopted to provide clearer guidelines on how the purchase price in a business acquisition should be allocated.
- Cookie Jar Reserves: This can take place in two ways. In the first scenario, a company with record revenues overstates its bad debt expense in quarter/year A so as to record little bad debt expense in subsequent quarters/years when it expects to achieve below average revenues. In the second scenario, a company understates revenues by inflating unearned revenues in quarter/year A so as to pad revenue figures in subsequent quarters/years should they fall below market expectations. Since 1998, the SEC has released Staff Accounting Bulletin (SAB) 101 outlining with more clarity when deferring revenue is a permissible practice.
- Materiality: the concept of materiality is a gray area of accounting and consequently is subject to different interpretations. Chairman Levitt invited auditors to use more professional skepticism in the way they look at materiality when conducting financial statements audits. Sometimes, publicly traded companies resort to questionable accounting practices with immaterial effects but that allow the company to meet or beat analysts earnings expectations. In this type of situation, Chairman Levitt recommends that the misstatement be considered as material because it is very likely that the company's stock price would have declined if the misstatement had been corrected. In 1999, the SEC released SAB 99 providing a better understanding of the definition of materiality.
- Revenue Recognition: Some companies accelerate the recording of revenues to give a nice face lift to their operating results because they are in desperate need of financing. This situation is very peculiar to companies in their early stages of growth. This is the reason why SAB 101 was released as explained in the "Cookie Jar Reserves" section.
I have no doubt that there is a host of companies out there always looking for additional loopholes in the established financial reporting standards so as to keep managing their earnings. As demonstrated by former SEC Chairman Arthur Levitt, earnings management techniques may follow the letter of the rules of standard accounting practices, however they certainly deviate from the spirit of those rules. I personally think that it is rather unethical for a company's management to condone the use of legitimate accounting techniques that have for sole design to misrepresent the quality of earnings to existing and potential users of financial statements. With the proposed adoption of IFRS (International Financial Reporting Standards) by the SEC, I wonder if the practice of managing earnings won't become more pervasive since IFRS seems to be more of a principles-based system (involving more judgment) whereas US GAAP is more of a rules-based system (involving less judgment).
Suggested reading:
- Earnings Management and the Abuse of Materiality, Journal of Accountancy
- Quality of Earnings and Earnings Management: A Primer for Audit Committee Members, AICPA
- Detecting Earnings Management, Dr. Gary Giroux, Mays School of Business at Texas A&M University
- Earnings Management: Short Term Gains, Longer Terms Costs, Dr. Nicole Jenkins, Owen Graduate School of Management at Vanderbilt University
Tags: Accounting Profession, AICPA Code of Professional Conduct, Business Ethics, Corporate Fraud, Corporate Governance, Ethical Judgment, Ethical Standards, Integrity, Ponzi Scheme, Public Trust | Category: Audit and Assurance, Careers in Accounting, Financial Accounting, Management Accounting, Master of Accounting, Words to the Wise | Integrity is one of the essential pillars of the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct. A distinguishing mark of the accounting profession is acceptance of its responsibility to honor the public trust. Lenders, investors, government agencies, and other members of the business community rely on the integrity of certified public accountants to preserve the proper functioning of commercial activities. Indeed, the published independent annual audit reports of the financial statements of public companies play a fundamental role in maintaining the soundness of business transactions of all types. Active and aspiring public accountants ought to embrace the obligation to act in a way that warrants the faith that the entire public reposes in the work they do or will do. Richard L. Schmalense, former John C Head III Dean of the MIT Sloan School of Management, once stated: "Without ethics, business can't be done – or taught". In the wake of the resurgence of high profile Ponzi schemes and corporate frauds, it is now more important than ever to teach standards of professional conduct in undergraduate accounting and business curricula. While it may be impossible to mold every undergraduate student into a business professional that will spouse the form and spirit of ethical standards, it remains nonetheless essential to impress upon students the significance of fostering an organizational culture that values a high standard of business behavior. I personally think that the chapter on professional ethics taught in the introductory auditing course is not enough to ingrain in students' minds the necessity of conducting their duties in accordance with professional standards. Additionally, I don't know why anybody should wait until enrolling into a MBA program before he or she is exposed to a course on business ethics and corporate governance. Business programs need to be reminded that repetition has a pedagogical significance. Ethical cases should be regularly discussed in each and every accounting and management course at the undergraduate level. This will ensure that business and accounting college students are adequately prepared to deal with most ethical dilemmas that could arise in the workplace. It seems to me that universities are churning out a lot of business and accounting graduates that sadly are unable to identify business situations requiring sound ethical judgment. It is about time to start putting an end to this very alarming trend. Accounting professionals have always been held in high esteem because they are viewed as business professionals that do their work with a high degree of integrity. With major accounting firms being repetitively and deservedly scrutinized for failing to flag some flagrant cases of fraudulent financial reporting by their audit clients, I am increasingly concerned that public accountants will soon start loosing the good reputation that so many of their earlier generations worked so hard to establish and preserve.
This week, I am going to cover the area of management accounting (often referred as managerial accounting or cost accounting): a division of accounting that is given little to no consideration by most students majoring in accounting. Little attention is given to management accounting because most students equate their post bachelor accounting career to working as either auditors or tax accountants. However, the Institute of Management Accountants states "In fact, of the five million finance function professionals in the U.S., more than 90% work inside organizations as management accountants and finance professionals". Indeed, only 35% of students graduating with a bachelor in accounting do end up in public accounting. The other 65% join the ranks of the private sector working in businesses accounting divisions or some other areas unrelated to accounting. I do however have some bad news for those of you who firmly believe that you will be among the 35% going to work in public accounting. Only 50% of those who start a career in public accounting will remain within the industry after five years. I will devote one of my future posts to employment trends within the accounting profession and why is it only a small percentage of students with accounting degrees are able to achieve a successful career in public accounting. The point I am trying to make with all those statistics is that most students holding a bachelor in accounting will end up working in the private sector. This entails that management accounting is going to most likely come back haunt most of you unless you give it the respect that it deserves while you are in college. The Institute of Management Accountants(IMA) states "Management accounting is the internal business building role of accounting and finance professionals who work inside organizations. These professionals are involved in designing and evaluating business processes, budgeting and forecasting, implementing and monitoring internal controls, and analyzing, synthesizing, and aggregating information—to help drive economic value.The role of management accounting differs from that of public accounting, since management accountants work at the “beginning” of the value chain, supporting decision making, planning and control, while audit and tax functions involve checking the work after the fact. Management accountants are valued business partners, directly supporting an organization's strategic goals. With a renewed emphasis on good internal controls and sound financial reporting, the role of the management accountant is more important than ever." I could not have have come up with a better explanation of the role of the management accountant and how it differs from that of a public accountant. In other words, you will need a specific set of skills if you wish to become an effective management accountant. Indeed, depending on your level of experience you will be called upon to perform a variety of tasks including but not limited to variance analysis, buy vs. lease analysis, product profitability, cost analysis, sales management scorecard, sales and financial forecasting, capital budgeting, and annual budgeting. Because there is a lot of computing and analysis involved in management accounting, it does require more technical skills than financial accounting and reporting. Consequently, I would strongly advise any student majoring in accounting to wait for the last semester to schedule the management accounting (i.e cost accounting or managerial accounting) course. At some institutions it's a two course sequence. If you happen to be in that situation, you should take the two classes in your last two semesters. Since there is no way of telling how soon, if ever, you will go work in the private sector, taking management accounting last will make it easier for you to refresh your memory a few years after your graduation from college. Another advantage of saving management accounting for last is the added benefit of a smoother preparation for the CPA exam. Should you take management accounting sooner than you senior year, it is very likely that you will be laboring while reviewing for the CPA exam because management accounting is a very unique area of accounting. As a matter of fact, I like to think that courses such as auditing, business law, tax I, tax II, and management accounting must be taken in your senior year if you wish to maximize your chances of beating the CPA exam on your first two tries. No matter how good of a student you are, you must strive to always be able to hedge your bets. A good mastery of management accounting is certainly one proven way to ensure that you remain immune to the unwanted side effects of having to transition from public accounting to management accounting. PS: Now proceed to the "Accounting Lecture Notes" page for some study aids related to management accounting.
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I am currently enrolled in a Master of Professional Accounting program at UWG. I intend to develop expertise in Fraud Examination and Business Advisory. The Student CPA is a blog that strives to provide learning resources for accounting courses, graduate business school admission tips, information about careers in accounting, and job search strategies.
Wednesday, 21st of April 2010 at 11:50:06 PM
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