Professional Documents
Culture Documents
Introduction
financial information and making decisions contrary to internal control policy (Vitez, 2017).
adjustments (U.S. Department of Health & Human Services, 2018). There are three types of
specific situations on management overrides: concealing or not disclosing facts that may affect
misrepresent financial position or performance of the entity, and altering records or terms related
to significant and unusual transaction. Those situations reflect that in order to get profit,
Managements have the responsibility to ensure appropriate financial reporting, they have the
obligation to review financial statements before statements are issued and make any appropriate
adjustment. While such actions could be called the management override which conducts
improper behavior that affects the financial decision making so that exerts a negative impact on
the overall accounting environment. According to the latest global Economic Crime Survey
(ECS) prepared by PwC, middle and senior management account for 14% and 42% respectively
(2008) stated, there are serious issues of management override in various industries. For
example, in a chemical company, an assistant accountant had realized a doubts whether a project
has an ability to generate sufficient future revenue. However, when the assistant accountant
talked to CFO about this issue, the CFO reluctantly admitted to this fact. Actually, CFO’s bonus
was performed based on the company’s annual profit, so the accountant suspected CFO’s
motives for not writing off this and other doubtful projects. To conceal his true purpose, CFO
paid the accountant’s salary to try to ignore this problem and show a fake high revenue in their
financial statements. This is a typical case related to management override faced by accountants
when they prepare financial statements. Therefore, it is necessary to study the effect of
The existing research has been working on the management override for a long time. Several
studies have shown some indicators of management override. Hayes (2008) states that there are
several bad signs of management override, such as physical dislocation, bending the rules,
exception becoming the rule, and unusual numbers. Therefore, auditors need to pay attention to
those unusual signs to avoid management override leading to a fraud. Furthermore, several
literatures explore the reasons of management override. PwC (2011) investigates several factors
may exist which provide the incentive for management to override controls, such as internal and
external pressure, personal financial problem or unable to meet financial target. As skaife, H. A.,
Veenman, D., & Wangerin, D. (2013) found in their research, insider trading profitability is even
greater when insiders are more likely to act in their own self-interest. In addition, Gordon, J. N.
(2002) states that the most important guarantor of an accountant's independence is that its firing
is highly salient, which means that the management may force accountant by make a threat of
dismissal.
Despite the previous research has contributed a lot on the study of management override, it
just either focused on the effect of auditing on management override or focused on the
independence together and put forward some practical solutions to deal with management
conflict between management override and Accountant independence in the previous research.
Thus, the purpose of this review of literature is to explore the solutions to mitigate management
field.
Accountant’s Independence
Although accountants’ responsibilities are different from auditors’ but they have so much in
common, especially independence. Because of independence, only the people who do the work
of the auditor have been specially stressed. Albert D. Spalding Jr. and Alfonso Oddo (2011)
defines that independence simply requires auditors to maintain independence from their clients
when performing attestation services or review. Adebayo Olagunju (2011) stated that auditors’
Both auditors and accountants spend time on financial statements, accountants who need to
prepare for financial statements also need independence. In accounting field, accountants’
independence means different jobs are completed by different people (Blann, 2010). In other
words, the person who did the job is not influenced or controlled by another one and should be
objective and free from bias or prejudice (Blann, 2010). Freier (2004) also pointed out that an
integral part of the ethical component of the accountant’s domain is the requirement to maintain
“independence” from the managers of the company being audited so as to ensure that the
accountant provides the public with an objective, unbiased assessment of the financial
independence in fact and appearance and maintain the reliability of the financial reporting
(Taylor, DeZoort, Munn, & Thomas, 2003). Therefore, as independent accountants, they should
Responsibilities of accountants are affected by financial managers, since managers apply their
judgment and estimates to recognize and measure assets and liabilities. This indicates managers
have discretion to influence the credibility of the financial statements under GAAP; that is,
managers can use their discretion to generate the biased financial information (Hollis, 2004).
Auditors are employed by top management for all practical purposes and this behavior reduces
management for specific purposes. The reason is that managers prefer to hire accountants who
have no threats to their inappropriate modification on the financial statements (Hollis, 2004). To
maintain the credibility of the financial statements, they are required to be independent during
the accounting procedures. This implies that managers will affect the performance of accountants
and accountants may make fake accounts on the financial statements to be in accordance with the
work of auditors.
There are two indication that implies management override would occur. One indicator of
management override is that accountants will conceal transactions that may affect amounts in the
financial reports. The deficiency of accountants’ independence might lead to misstatements in
the financial reports. Take a typical case of Enron fraud transactions. In an engagement regarding
whether to record taxes the day occurred, executives concealed these expenses to avoid income
taxes. This illegal behavior caused the downfall of this multi-billion dollar firm (Adebayo, 2011).
Another indicator of management override is that accountants will alter records or terms related
to significant and unusual transactions under the authority of management. The impairment of
accountants’ independence indicates they fail to disclose facts that may affect amounts in the
financial statements. This means that accountants might be affected by management override if
they lose independence in the work. For example, if a seller had sold his house in December then
the seller could have taken advantage of certain tax benefits. However, he only realized this
transaction in January and wished to backdate the document to December. In this scenario, the
event did not occur during the time period required for the benefit but the management of this
selling company pretended that it occured. Accordingly, this company recorded this tax benefits
Because accountants and auditors are required to be dependent in the work, constructed
decisions management made (Radin, Arthur J. 2008). The effective method to alleviate this risk
financial director computes fraudulent journals and debits accounts payable accounts, causing a
understatement of liability and thus a overstatement of net income. Thus, it is significant to test
the appropriateness and accuracy of journal entries and adjusting records for auditors. In
addition, the existence of inherent weakness makes management override possible. PCAOB AS
2401 (2007) sets several agenda to guide auditors to confront with the risks of management
override of controls. Auditors need to inspect the sources of evidence, examine entries, focus
much on year-end and high risk accountants, review and evaluate whether is significant account.
Because a large number of financial supervisors or financial managers engaged in the auditing
work or have taken auditing courses before developing financial work, they probably may be
able to devise ways to get around the auditors. To illustrate, if the auditor sends a party in a
confirmation asking if the contract is complete, this action will reduce the risk of side letters, not
a zero. Since a client can anticipate the confirmation and conspire with the recipient. This
suggests there are inherent weaknesses in the auditing process that make management
In this review of literature, we have found that accountants are probably facing the pressure
from the management while preparing financial statement, and it is necessary to provide some
strategies to mitigate the pressure and enhance the reliability of financial reporting ( O’Leary,
2008). However, the previous scholars either focus on the strategies to address the risk of
preparing financial reporting (Hayes, 2008). Therefore, in this review of literature, we have
studied the effect of management override on accountants’ independence and provide some
specific solutions related to ethics education and complying with the accounting standards to
suggest that ethical education on accountants is one of the strategies that can be used to mitigate
education has a positive influence on ethical attitudes of accounting students. It is a good way to
help accountants keep independence and enable them to learn how to make decisions in different
kinds of ethical dilemmas. As for ethical education, one of the probable methods to instruct
accountants is to create some scenario simulations or cases of ethical dilemmas. In these cases,
accountants will be educated to maintain various professional qualities, such as objective and
they will understand how to deal with the specific issues as well as corresponding consequences.
For example, Enron is a typical case that involves concealing transactions which may affect
amounts in financial reporting (Adebayo, 2011). In that case, the management directed
accountants to conceal the amount of income tax payable account to avoid paying income taxes.
When facing this type of management override, accountants after receiving ethical training
should keep objective as well as integrity and record the amount that should have been recorded
based on GAAP, which is the most important requirement for accountants while preparing
financial statement. Due to the limited regulations to protect accountants from management
override, we suggest that accountants could report this issue to the Direct Board, which is the
accountants are likely to prepare financial statement objectively and enhance the reliability of the
financial reporting.
The other strategy that we recommend is to require accountants to comply with professional
standards or codes such as SAC, even if they encounter management override while preparing
financial statements. The IESBA provides ethical standards that professional accountants must
comply with the code of ethics. (IESBA, 2013). In addition, SAC also states the specific
requirements related to different accounts that accountants are allowed to follow. Therefore,
when facing some misstatements in financial statement, accountants have to perform the
procedures that are in agreement with the standards or codes. In a specific situation, the
management will probably alter records in order to acquire some benefits. For instance, based on
the standards, the company could take advantage of certain tax benefits if the company sold a
house in December, while that company actually realizes this transaction in January in the next
year. In order to obtain that tax benefits, the management asks the accountant to backdate the
document to December. In this case, the accountant is aware of this illegal action because it
breaches the regulation in SAC. According to SAC 605-15-25, the revenue from the sales
transaction should be recorded at the correct date. Therefore, the accountant should refute the
manager’s request of backdating and record the revenue in January instead of in December. In
this way, accounts are more likely to develop effective performance of reporting financial
statements.
Conclusion
A great deal of accounting scandals are due to the fact that corporate executives make fake
financial statements and inflate their income in order to pursuit benefits. In this process, whether
to comply with the accounting standards or to follow the manager's instructions becomes a tough
for accountants. Thus, this paper discusses how accountants independence is influenced by
management override and how accountants should do when they are authorized with
management override. According to literature review, what strategies can help accountants make
the appropriate decisions when facing management override. However, these strategies depend
on the level of the pressure from the managers and the quality of accountants. Therefore, more
References
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