RSS Feed

Draft of article “What accountants do” (approx 2000 words)

20 March 2010 by shartley   

There was once a girl in Year 12 who didn’t know what to do when she finished school.  All she knew was that she eventually wanted to work in the Sydney CBD and be financially successful in an illustrious career.  One day, a handsome young man in a nice suit, representing one of the Big 4 accounting firms of the world [see box of the Big 4 Accounting Firms of the World], spoke to students in the girl’s school.  He spoke of a traineeship which enabled students to work full-time for his firm while studying part-time at university for an accounting degree.  This was perfect, thought the girl.  After submitting her resume and booking an interview she dreamt of working at one of the top floors in the city, looking down at the other office blocks, the harbour and the parks.  The interview process consisted of three different interviews and a tour of the firm.  It was all very exciting until the last interview, when a bored manager asked the girl what area of accounting she wished to work in.  “What areas are there?” she asked.  He gave her an exasperated, perhaps even surly, look, and listed areas such as audit, tax, business services, financial accounting and management accounting, “which is the area I work in,” he said.  “Ooooh,” exclaimed the girl.  “That one sounds interesting.  Management accounting is the area I’d like to work in.”

The girl’s application was unsuccessful.

Dictionaries provide overly simplified definitions of accountants [see box of definitions].  They focus on the financial accounts or records kept by businesses.  Of course this is one of the most featured areas of accounting but it belies the depth and scope of the field of accountancy.  Accountants communicate financial information in the form of accounts, advice and reports.  They are important when times are good to monitor profits and advise how to make them even bigger but also when times are bad to help businesses from the brink of disaster or to break-up a business that is beyond saving and possibly bankrupt.  Accountants are employed by accounting firms, private businesses, governments and other institutions, across all industry sectors.  They can work as sole traders or be part of a global business.

Financial Accounting

Financial accounting is the area most recognised by the general public because broadly speaking, it is about producing reports for people and institutions external to the business.  Financial accountants prepare financial reports, the main reports being the Revenue Statement, the Balance Sheet and the Cash Flow Statement.  These appear in the Annual Reports of companies for the general public to view but they are also used for internal purposes.  To produce these reports accountants record every single financial transaction of a business.  Each transaction consists of a debit and a credit.  Since there are two sides entered into the books for every single transaction this is often referred to as double-entry accounting.  For example, when a business pays its employees it debits salaries, an expense, and credits cash, an asset.  Each item, whether it be a form of revenue, an expense, an asset, a liability or capital, has its own record.  The General Ledger lists each individual ledger account.  They can then be organised to form the financial accounts.

Accountants in large firms can be responsible for particular areas of financial reports.  For instance, the employment relations department of a business needs to make sure employees are paid and the transactions recorded.  Superannuation needs to be invested, company car leases need to be paid, recruitment firms need to be paid, employees need to reimbursed for expenses they incurred on behalf of the business, any extra benefits employees receive need to be transacted and Fringe Benefits Tax paid on them, and leave needs to be accrued within the accounts so the business knows how much they are liable to pay.  Accountants or account clerks are the employees who perform these tasks.

Tax Accounting

A branch on the tree that is financial accounting is tax accounting.  There are a range of taxes to which businesses are subjected, including Company Tax, Goods and Services Tax (GST) and Fringe Benefits Tax (FBT).  Not only do tax accountants produce the reports for calculating tax (which can be different to those required by other regulatory bodies) but they also check for compliance to tax law within the business (or for individuals), offer advice on how to avoid tax (avoiding tax is legal, evading tax is illegal) and prepare tax returns.

Management Accounting

Management accounting focuses on reports that are needed within the business including budgets, feasibility studies and merger and acquisition reports.  The management accountant helps managers establish budgets for all sections of the business and then measures actual financial performance against the budget.  The sales forecast is an important part of management accounting.  Each sales person could be given a target of revenue they are meant to produce, according to the sales forecast, and then the actual results are checked against the target.  Any variances would need to be evaluated for the cause of the difference and management would decide if any adjustments in conditions or targets are necessary.  Another sales focus could be on the products.  Behind the sales item in every Revenue Statement are all the different products that make up those sales.  Analysing each product line enables management to determine what products are more successful than others so they can then make decisions about future courses of action.  Accountants produce the reports to enable the analysing, but they are also involved in the analysing process.

Cost Accounting

In large firms it is vital for management to know what sections of the business are making money and which sections are spending too much.  The budget is made for a whole company and then broken down into individual departments, geographical locations or products.  The cost accountant ensures that the correct portion of each transaction is allocated to the correct section, location or product.  For instance, the firm may pay for employees to attend a course in how to use spreadsheets but the staff members come from a variety of departments.  The cost of that course needs to be allocated across departments according to the number of employees in each.  An example of cost accounting on a product basis is when packaging is bought for a number of different products.  The cost of the packaging must be distributed across the various products for which the packaging was bought.

Auditors

There are a number of different ways to be an auditor.  The girl mentioned at the beginning of this article applied to the NSW Audit Office for a position.   The NSW Audit Office checks the accounts of the NSW government agencies for accuracy and reliability.  This is the main job of auditors, they sign-off on the accuracy and reliability of financial statements by thoroughly checking the recording of underlying components.  Auditors also work for accounting firms.  Businesses employ auditors from accounting firms to sign-off on their financial statements.  This is required by law for Annual Reports and Prospectuses.  The Big 4 accounting firms used to be The Big 5 until 2002 when the accounting firm, Arthur Andersen collapsed.  Arthur Andersen, as chief auditor for the US company Enron, was caught up in Enron’s downfall under the weight of fraud and corruption.  The common view was that Arthur Andersen must have been corrupt too since they approved accounts which should have been found fraudulent.

Instead of working for the NSW Audit Office the Year 12 girl took a position with a small accounting firm in the suburbs, which was not quite the thriving metropolis she desired. Smaller accounting firms perform audits on smaller businesses. The girl participated in three audits with this accounting firm.  The first was just a simple compliance audit where coins were ran through the pokies of a local club to check what was recorded by the machine was what actually occurred and that the club was also recording wins accurately.  The second audit was of a horse stud where records of horses being purchased had to be checked for their actual existence at the horse stud, ensuring the description on the paperwork matched the horse itself.  The third and last audit the girl ever performed was on a car yard where she learnt that a lot more money is made from selling the cars traded in than from the brand new cars where the profits went back to the manufacturer.

Forensic Accounting

A friend of the girl started her auditing career with the NSW Audit Office but a few years later moved to the NSW Police as a Forensic Accountant.  Her job entailed checking the financial records of businesses suspected of fraud and corruption and then giving evidence in court if a trial eventuated.

Business Services and Advisory Accounting

Accountants provide advice to individuals, businesses, government and other institutions in a number of ways.  For instance, they can advise a business how to operate more efficiently, by identifying where costs can be cut or revenues increased.  They could also evaluate how productive the manufacturing arm is operating.  Accountants could also recommend strategies in the areas of employment relations, such as recruitment, training and retrenchment; or in marketing, particularly pricing strategies.

Mergers and Acquisitions

One area where it is important to gain the advice of accountants is in mergers and acquisitions.  When businesses are considering merging or acquiring another business experts are required to examine the financial statements to determine the viability of the investment.  This even applies to individuals looking to purchase a small business or franchise.  An accountant will advise if it is worth the asking price or if it is a business that is likely to be a future success.  Accountants may even negotiate on the purchaser’s behalf.  In more complicated investments a due diligence may be performed where accountants determine that all the facts presented by the seller are indeed accurate and reliable.

Insolvency Accounting

When a business does flounder it may go into voluntary administration.  The administrator is usually an accountant who looks to find a way for the business to return to fiscal success and operate again, able to meet its financial obligations.  If a business is unable to pay its bills it may go into receivership where a receiver, an accountant, is appointed to ensure all debtors are paid, aiming to keep the business afloat.  However, if a business is truly unrecoverable then liquidators, also accountants, are appointed to divide up the business in order to pay out claims on the remaining assets.

Environmental Accounting

As society becomes more concerned for the environment there is increasing pressure for environmental accounting.  In other words there is a demand for businesses to account for all actions of a business affecting the environment to be reported.  The difficulty in this reporting is placing a relevant and reliable price on these actions.  Yet this is an area that is seriously undergoing investigation.  At the moment environmental accounting is mainly in the area of cost-benefit analysis evaluating how a new project may impact the environment.

Fund Accounting

The girl who wanted to work in the CBD eventually did work in the heady field of finance.  She worked for a year in the suburban accounting firm, followed by three years as a tax accountant in a bank.  She then moved to an investment bank where she became a fund accountant.  A fund accountant records all the transactions of a trust or superannuation fund and produces appropriate reports and figures for internal and external requirements.  This includes calculating the unit price for the fund and the rates of return to be published in the media.  A fund accountant is an example of a more specialised accounting area that is peculiar to the financial sector.

As can be seen there are a number of areas that accountants work in and a huge range of tasks they perform.  Accountants have a unique view of how a business is performing and thus often go on to work at the top end of business as general managers, chief operating officers and directors.  Accountants don’t need to have a high level of mathematical ability but they do need to enjoy working with numbers and like problem solving.

As for our girl who knew so little in Year 12, after five years in funds management she left accounting to have children and later became a teacher.

A box listing the 4 Big Accountancy firms in Australia:
–    Deloitte: http://www.deloitte.com/view/en_AU/au/index.htm
–    Ernst & Young: http://www.ey.com/au
–    KPMG: http://www.kpmg.com/AU/en/Pages/default.aspx
–    PwC: http://www.pwc.com.au/

A box of definitions of accountant
–    a person who keeps or inspects financial accounts.  http://www.askoxford.com/concise_oed/accountant?view=uk
–    a person whose profession is inspecting and auditing personal or commercial accounts.  http://dictionary.reference.com/browse/accountant?r=66
–    somebody who checks finances: somebody who maintains the business records of a person or organization and prepares forms and reports for tax or other financial purposes  http://encarta.msn.com/encnet/features/dictionary/DictionaryResults.aspx?refid=1861583281

A box of the two main professional bodies for accountants:
– Chartered Accountants: http://www.charteredaccountants.com.au/
– CPA Australia: http://www.cpaaustralia.com.au/

“Trivia” Box:
Auditors use green pens for their little ticks to show they have vouched a certain document.  This is to distinguish from the more commonly used blue, black and red ink.

Box:
A quiz to ascertain the area of accounting that would suit you: http://www.charteredaccountants.com.au/students/game_quiz/student_quiz

For more information on environmental accounting:
http://www.epa.vic.gov.au/bus/accounting/whatisema.asp

Print Friendly, PDF & Email

»

Leave a Reply

Your email address will not be published. Required fields are marked *

Skip to toolbar