Challenge Reflaction
Abadit Wineh
Professor Lisa M. Volpicelli ACC2100 – FINANCIAL ACOUNTING
02/27/2022
Challenge 3 – Task 1
In order to demonstrate to Sophia why it is so important to follow these principles and guidelines, you must find an article about a company that violated one or more of these principles and guidelines and use it as an example for her.
Create a brief guide for Sophia that explains the 3 she needs to follow to record the company’s business transactions. Include examples and references from the article you choose.
Accounting principles define how companies and accountants should recognize, record, and present business and financial transactions. They ensure that a company follows the accounting standards when preparing financial statements. Full disclosure is a principle that requires firms to record all the information in the financial statements for the readers/users to understand it better and use it to make decisions. The materiality principle ensures that information that may affect the decisions made by the financial statement users is not omitted. Monsanto Company violated the full disclosure and materiality principle in 2009 and 2010 and was fined $80 Million after being found guilty. The paper will discuss the importance of accounting principles by using Monsanto as the case study.
The materiality principle ensures that companies do not manipulate financial information to fit their interest. Full disclosure helps the company to provide all information that would support the decisions made by readers and users. They protect readers and users of financial statements against being misled by false and incorrect information. For example, in 2009 and 2010, Monsanto Company failed to account for the cost of a program that was implemented to ensure that the distributors get huge rebates on one of its products, Roundup. As a result, the revenues increased, but the company only accounted for them and failed to consider the cost. This resulted in a material misstatement of income as the revenue was overstated by $ 44.5 and $ 48 million in 2009 and 2010, respectively (U.S Securities and Exchange Commission, 2016). For instance, the information was misleading; the income statement seemed appealing to investors and other interested people. Not disclosing and misstating the required or financial information about a company can result in deceiving and bad decision-making by the users.
A company should have strong internal controls to ensure compliance with the whole disclosure principle to avoid penalties and misguide the readers and public. "The full disclosure principle or the principle of openness is to present all information in financial statements that can affect the reader's understanding" (Meiryani, 2019). The principle promotes honest, transparent, and complete reporting of a firm's financial performance. It does include proper reporting of financial information and the available accounting policies, their changes, depreciation and asset valuation methods, goodwill, and business affiliates relationships that impact the transaction volumes, items that may not be quantified. Like tax issues, or existing lawsuit outcomes, among others, the information is usually included in the item description section of the financial statements, the balance sheet, income statement, or cash flow statement. It helps the readers understand everything going on in the firm well.
Accounting principles like full disclosure and materiality are crucial as they promote transparency, accountability, responsibility, and complete financial reporting. Conversely, violating any accounting principles can result in deficient performance, penalty, bankruptcy due to poor management, and a damaged reputation.
References
Meiryani, A. (2019). Full disclosure in financial reporting. International Journal of Scientific & Technology Research, 8(7), 340-45.
U.S Securities and Exchange Commission. (2016). Monsanto paying $80 million penalty for accounting violations. SEC. https://www.sec.gov/news/pressrelease/2016-25.html.