Investigating Creative Accounting And Opportunistic Behavior In Navitas Company 2017 Annual Report

The Importance of Accounting Policies in an Organization

Discuss about the Current Issues in Accounting for Engineering and Management.
 

The choice of accounting method is significant in then operation of the organization since changes in the accounting method could affect the overall operation of the organization Accounting methods are a set of rules and regulation that are used by the organization during the reporting of liabilities, assets and any other financial relevant uses in the financial services. Accounting policy are rules that dictate the ways financial statements are prepared, since there has been continuous increase in the number of policies and standards that continue to be approved globally and in Australia there is a continuous need for choice between the available policies because every policy is applicable to an area and might not address all issues and the policies do not advise on w to choose amongst them the best policy.

The establishment of this accounting policies that will be used in the organization as it operates could be established as the company begins or as it continues to operate depending on the need of the organization, once the choice of the accounting method has been made there might be difficulty in changing unless permission is granted by IRS.

The change from one policy or the merging of several policies to work together is key and should not be taken for granted since this change affect the operation of the organization, it should also be noted that though creative accounting provide deceiving and inaccurate statement it has not yet been classified as illegal.

This paper will investigate the aspects of creative accounting and opportunistic behavior as seen in the 2017 annual report of Navitas Company.

Navitas company is an educational services provider to approximately 80,000 students annually in more than 120 schools in 31 countries. It was founded in 1994 with headquarters in Australia. Its current CEO is Rodney Malcolm Jones.  

In an attempt to choose the best accounting policies financial preparers have opted for creative accounting, this is a situation where the financial preparers produce financial statement that are false or altered with an aim of providing a false impression to the shareholders and the stakeholders .Creative accounting can be applied in four ways as shown by Henderson et al. and it an but in this paper we will identify three examples and use the hypothesis provided by Henderson in explaining this behavior. The creative accounting methods that were identified in the company in this paper are note below based on the study of Navitas annual report and other peer reviewed journals and articles.

Examples of Creative Accounting in Navitas Company

In the annual report 2017 of Navitas Navitas is amongst the best organization in this area of educational provision industry amongst Evidera, Theranos and BIOVIA. They are confident of the future even as they have invested in risk management policies. Most accounting policies rely on this future predictions, shareholders and stakeholders also use this information on prediction of the prospects in an organization in making decisions concerning the company

There is an aspect of creative accounting that is used by the organization in the manner in which it has done it prediction of the company future there has been failure to recognize doubtful debts in the statement that could be recorded as future assets to help the copy in making decisions in the future, the failure to recognize this doubtful debts could also affect the employees earnings in the future therefore it is very significant to have accurate and reliable predictions unlike in the case of Navitas company where this has not been done. The neglection to include this liabilities in the financial statement could lead to negative changes in the future thus affecting not only the future of the shareholders’ investment but also the one the stakeholders. 

Prepares of financial statement may use material or status to conceal items that could draw the attention of shareholders and stakeholders from financial issues that are important which the preparers do not want to disclose to these groups (Di Pietr, & Ronen 2016). This same issue can also be seen in financial statement that are ‘creatively’ prepared on an effort to draw the attention of shareholder and stakeholders away from this issues that matter.

In the report of the company it can be noted that the company clearly indicates that it has been able to deal with the issues regarding its doubtful debts thereby focusing on other issues in the company such as the increased of its assets yet they haven’t and they continue to accrue debts as seen since 2014.

Navitas company is among the organizations that have engaged in creative accounting method mentioned above and they have done this by using its status of temporary prosperity to distract people for the issues that really matter such as debts, this is a creative account method since it produces false impression that the company is continuing well yet in real sense it continues to suffer some problems which could affects its future greatly. 

Factors Influencing Creative Accounting and Opportunistic Behavior

The choice of accounting policy is important since it dictates the whole operation of an organization (Mulford, & Comiskey 2011). Navitas company on the contrary has engaged in creative accounting methods in the way it has prepared its financial statements. This financial statement could be key in influencing the decisions of the shareholders and the stakeholders.

Navitas company has undergone several challenges as seen in their annual report of 2017 and among them being problems with management of the organizations that they have formed partnership with, accrual of debts and strong market competition this challenge have influenced this company in its failure to include some liabilities in the financial statement to produce deception of high assets and revenues (Bora, & Saha 2016) thus their profits will continue to increase. Other Ares where the company has undergone creative accounting is seen in its financial statement where it has neglected to indicate some liabilities and it has also increased the assets in producing a false impression that the company is continuing to prosper well. It has also employed extra balance financing and temporary inclusion of holdings at high market value compared to their purchase and current market price.

Even though the aim of organization except some non-governmental organizations is to provide profits, reasons can be attached to each of the actions that are undertaken by the organization in this case these reasons are discussed within the hypothesis in Henderson et al. as it can be seen below.

The reason why  this company has failed to disclose important issues that could affect the future of the organization can be attributed to income smoothening hypothesis here they have failed to disclose issues such as doubtful debts, the statement preparers engage in creative counting in order to continue receiving the same income that they are accustomed to receiver otherwise if they disclose this issues they could reduce their income as they would receive minimal support from the shareholders and the stakeholders, creative accounting practices by Navitas can also be because of capital market motivation whereby the decision made by the financial preparers is aimed at motivating the shareholders and the stakeholders to continue with their support for the organization instead of them learning of the problems that the company is facing. 

The motivation behind failure of Navitas to disclose the challenges posing a threat to the company hence influencing the performance of the company such as the increase in competition in their sector from other organizations amongst problems with management of the partnerships they have heard despite  generating the annual; report with their strategies on dealing with such issues is because of  contractual motivation where the financial preparers know that if they produce information regarding some of the challenges that they are facing they might lose the benefits, allowance s and the huge salaries that they get, therefore in their self-interest they produce this deceiving statements to the shareholders and the stakeholders who continue to provide their constant support blindly or unware  of the issues that the organizations are undergoing since they are not indicated in the financial statements.

Opportunistic Behavior and Managerial Decision Making

The reason behind the company being creative in their financial statements so that they provide a false impression of prosperity indicated by the increase in assets and reduction in  liability is capital market motivation where in an attempt to maintain the shares and the status they have in the society they engage in this methods, in other words they engage in desperate measures to maintain their capital market (Akpanuko, & Umoren 2018).In the fear of losing their benefits, allowances and salary financial preparers have opted to neglect or add some recording in the financial statement so that they continue to benefit since if the shareholders or stakeholder are made aware they will no longer support the company.

Opportunistic behaviors are practices that are undertaken by the organization to meet their own self-interest in the expense of other who could include the shareholders and the stakeholders. This opportunistic behavior is made when the managers are to make choice between the best accounting policies.

To provide its services globally Navitas has developed several partnerships with educational institutions and other non-governments organizations (NGO). They do not employ the management of this organization since this is partnership but they have interest in the management decisions that this individual make. They have had problems in achieving their outcomes of providing educational services to some institutions as the managers have invested in their own personal interest neglecting the objective of the company. Since they did not have a policy regarding the managerial behavior this problem could continue. To deal with this, they could employ the use of bonding where they could limit the activities of the mangers in the other copay such as limiting the amount that the mangers should withdraw and use per day during the business. The use of contract could also be employed in that in the contract it could be signed that the performance of the manger is attached to the benefits they get so that to get more benefits they must perform better.

Conclusion

Creative accounting are methods by accounting preparers that are aimed at producing false impression while opportunistic behaviors are practices made by the mangers to have self-gains. This issue should be deal with otherwise they may result to the dissolution of the organization or institution.

These methods can only be dealt with in strict observance of policies that are established by the organization and the country at large. With the increase in policies and standards this issues of creative accounting are set to rise as companies strive to cope with the challenges facing the organization without upsetting the shareholders and stakeholders. The accountants and mangers are supposed to be motivated to produce financial statements that are have integrity, accuracy and principality if the organization is to prosper.   

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