The Impact Of The Financial Crisis And The Reaction To The Financial Crisis – Assignment Example

TOPIC - THE IMPACT OF THE FINANCIAL CRISIS AND THE REACTION TO THE FINANCIAL CRISIS Literature review Changes introduced in the UK accounting standards
The accounting standard in UK had seen many fraudulent cases arising due to the lack of ethical awareness. The UK Accounting Standards Board (ASB) had suggested introducing several changes in the financial reporting standards as seen in the UK as well as the Republic of Ireland (The future of UK GAAP, 2012). The ASB had proposed to substitute all the present financial reporting standards with the IFRS for the small and the medium-sized companies. The ASB had decided to eliminate the earlier proposals that had recommended the tier system for all financial reporting (The future of UK GAAP, 2012). Changes were also introduced in the auditing standards in UK. Some investors had expressed their will for a more frequent use matter related to audit reports in order to draw the attention of the user in the most difficult areas. But the auditing standards in contradiction would indicate towards the occasional use of such processes so as to lessen the impact arising from such statements (AUDIT OF BANKS: LESSONS FROM THE CRISIS, 2010, p.2). The Financial Reporting Council (FRC) had made it mandatory for the auditor to understand that the auditor conveys the importance of a professional judgment to the audit committee (Financial Reporting Council, 2012).
Creative accounting
A critical situation often tempts a manager to resort to unethical means in order to make the financial statements look better. This gave rise to the problem of creative writing. In creative writing the financial figures presented are not real but ones that have been arranged to appear so (Gherai & Balaciu, 2011, p.2). In other words it is a technique of creating the desired outcome (Gherai & Balaciu, 2011, p.2). The creative accounting cases were seen in several accounting companies. One such company was the Turkish bank named Imarbank (Gherai & Balaciu, 2011, p.3). The annual financial reports present the positions maintained in the balance sheets and accounting reports. But unethical means are adopted to suppress the actual situations in these reports by creative accounting. So, scholars believe that the problem cannot be uprooted unless the aspects that lead to it are removed (Gherai & Balaciu, 2011, p.7). Various research studies had pointed towards management motivation for leading to creative accounting behavior. This included tax levies, shrew holders confidence etc (Amat & Gowthorpe, 2005, p.5).
Lack in the detection of fraudulent practices
There is a lack observed in the application of ethical norms while detecting the fraudulent practices like creative writing and frauds in accounting places. One of the reason is the traditional methods adopted in t he accounting standards like sampling which cannot be an appropriate measure in huge financial institutions. Another reason is the old obsolete strategies that can no longer address the present situations (Luyendijk, 2012). The auditors most often fail to identify the actual problem leading to misleading results. There are also cases of aggressive earning practices seen in some companies (Fearnley & Beattie, 2005, p.4).
Improved education as a means to solve the problem
The fraudulent practices seen in the accounting behaviors cannot be reduced by changing the regulations alone. The ethical perspective of the problem needs to be addressed to. The ‘Ethical Standards’ (ESs) of the Auditing Practices Board (APB) UK consist of the basic principles and the essential procedures along with the related guidance for ethical practice. These guidelines include the ethical integrity, auditor’s objectivity and the independence for the auditors to audit the financial statements (Knowledge guide to UK Auditing Standards, 2012).
Accounting is a social science that reacts to changes seen in the global economic crisis (Alwan, 2012, p.1). Any sort of problem faced in the accounting scenario cannot be removed or eradicated by changing the prescribed procedures. Awareness of the people is more essential in these matters. Critical situations can make the financial auditors to adopt unfair means like creative writing. Educating these people to increase their ethical awareness can help in these situations.
1. Amat, O. & Gowthorpe, C. (2005), Creative Accounting: Nature, Incidence and Ethical Issues, available at: (accessed on September 29, 2012)
3. AUDIT OF BANKS: LESSONS FROM THE CRISIS, (2010), available at: < > (accessed on September 29, 2012)
4. Fearnley, S. and Beattie, V. and Brandt, R. (2005), Auditor independence and audit risk: a reconceptualisation. Journal of International Accounting Research 4(1): 39-71. , available at: < > (accessed on September 29, 2012)
Financial Reporting Council, (2012), available at: (accessed on September 29, 2012)
Future of UK GAAP, (2012), available at: < > (accessed on September 29, 2012)
Gherai, D., S. & Balaciu, D., E. ( 2011), FROM CREATIVE ACCOUNTING PRACTICES AND ENRON PHENOMENON TO THE CURRENT FINANCIAL CRISIS, available at: (accessed on September 29, 2012)
Knowledge guide to UK Auditing Standards, (2012), available at: (accessed on September 29, 2012)
Luyendijk, J. (2012), External auditor: Nobody at a bank can have a complete overview any more, available at: < > (accessed on September 29, 2012)