Accounting Issues Australian Law Firm

Questions: 1. How did Slater and Gordon meet the capital markets expectation of the firms growth as reported in the Undoing of Slater and Gordon?2. Review the annual financial reports of Slater and Gordon for the reporting years 2013, 2014 and 2015. Analyze how revenue was recognized in each of the reporting years, and explain why the firms reported revenue dropped significantly in 2015? 3. In your opinion, are there any breaches of the fundamental principles of accounting ethics (as prescribed in APES 110 Code of Ethics for Professional Accountants) in the firms accounting practices? Explain Answers: 1. Slater and Gordon became the first Australian law firm to go public in 2007. It also had high revenues and there was no end to expansion. With a strong framework and immense solidity it reached significant height. It entered the UK market in 2012 with the acquisition of a number of smaller law firms in UK. It was one of the major ways to enhance the reach and availability of the firm. Revenues soared and led to the acquisition of Quindell in 2015. This aggressive market expansion strategy coupled with the growing profits was sufficient to make the market believe its growth story. The growth was highlighted with the concept of strong market penetration and strong level of efficiency (Fyfe, 2016). The share prices reached the highest in April 2015 post which the downfall began. The fact that Slater and Gordon have fought some of the most complex cases in Australia made it trustworthy in the eyes of investors. In the midst of these acquisitions and great performance, it is widely kno wn that it was the one acquisition of Quindell which turned the cards otherwise. Its ability to deliver key figures as headlines and the reassuring corporate upward track record made it a good pick for the investors. Its concept of no win no fee also became popular and made it win fame. Thus by all these factors Slater and Gordon won market confidence and displayed growth. 2. Slater and Gordon followed the concept of Work in Progress for recognition of revenues. It also followed the concept of no win no fee in personal injury cases which means that the revenue will not be realized until the case is completed and won. It was one of the unique idea that was proposed to have a different set of working. So in such cases, the revenue is recognized on the basis of progress of the work and the estimation of the likelihood of success based on the status of completion and current progress of the case (Christensen, 2011). Thus, the revenues were recognized in the years 2013 and 2014 on the cases that were under progress. This led to the firm reporting higher profits. But in fact, the actual money was either not recovered in full or totally not recovered at all. Thus, it had reported $467 million of work in progress in 2014 and $826 million in 2015. It means that there was a difference in terms of reporting numbers and realization. As pointed out by Tynan, work i n progress is one such accounting concept that gives the management huge discretion in deciding the amount of reported profits. This raised a red flag towards the firms attitude of accounting and aggressive acquisitions. However, every firm cannot go with this strategy and is even complex in nature as the firms cannot survive for long with this concept (Simnet Emby, 2005). It was also researched and found that Slater and Gordon was buying the undervalued work in progress of these smaller law firms that had the impact of inflated profits. This was again proved when the firm started facing cash difficulties as the Work in Progress so recognized was not recovered in terms of cash even after eighteen months to two years. The combines impact of all the work in progress accounted in 2013 and 2014 became evident in 2015 as there was no matching of revenues with the cash flow. Majorly, the work in progress created immense problem for the firm and surrounded it with difficulties. Tough time s began as ASIC started investigating and stated elevated work in progress and accelerated acquisitions to be the root causes for the disaster. The downfall happened because the work in progress escalated immensely and thereby, it was unable for the firm to operate (Gay Simnet, 2015). Thus the remarkable expansions turned out to be risky and the firm that was once in limelight is now struggling for its survival. The struggle can be cited due to the complex program of the management that disturbed the entire scenario and did not allowed further expansion. Such strategies are beneficial only in the short term course (Baldwin, 2010). However, when it comes to the long term perspective it is difficult to conduct the operations on this strategy. 3. Accounting is an area requiring sufficient knowledge and expertise. It cannot be performed without an expertise. Hence, it is essential that the operations should be conducted by those having a strong level of efficiency. Not just the auditors, but the accountants are also expected to be competent enough with the accounting standards and the practical application of the fundamental principles of accounting (Gilbert et. al, 2005). It is important that the accountants must adhere to the fundamentals and provide a strong level of transparency. As the whole, in the case of Slater and Gordon topsy turned on the single concept of Work in Progress, it would not be wrong to say that there has been a breach on the part of the accountants and auditors (Fyfe, 2016). Professional competence and Due care, integrity, objectivity and professional behavior are a few fundamental requirements. Revenues recognized that might be never realized are a clear instance of prudence. This concept requires t hat accounting should provide for all possible losses but not account for profits that are uncertain (Heeler, 2009). Uncertain profit should never be accounted as it is an event that is contingent and therefore, the happening is not sure. So this concept has been violated by the firm (APES, 2016). Given the stand that accountants have flawed in the understanding and application of the concept of Work in Progress, what is more surprising is that the auditors have also been signing these financial statements and performed the audit of the accounts without discovering the inflated revenues and window dressed profitability (Fyfe, 2016). Hence, it is clear that there has been a flaw by the accountant and auditors. Such a concept should never be permitted and provided a consent as it leads to immense problem in the long run. No business can survive with the work in progress system as it is based on happenings that are contingent in nature (Cappelleto, 2010). This clearly lands the auditor s also in professional negligence and lack of sufficient auditing procedures. It is the duty of the auditor to consider all the aspect of the business and ensure that it is free from any shortfalls (APES, 2016). However, the auditors in this scenario failed to trace the errors and hence, considered a violation. Thus APES 110 has been breached. References APES 2016, APES 110 Code of Ethics for Professional Accountants, viewed 29 September 2016, https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf Baldwin, S 2010, Doing a content audit or inventory, Pearson Press. Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, AFAANZ, Melbourne Christensen, J. 2011, Good analytical research, European Accounting Review, vol. 20, no. 1, pp. 41-51 Fyfe, M 2016, The undoing of Slater and Gordon, viewed 29 September 2016, https://www.smh.com.au/good-weekend/the-undoing-of-slater-and-gordon-20160613-gphmej.html Gay, G Simnet, R 2015, Auditing and Assurance Services, McGraw Hill Gilbert, W. Joseph J Terry J. E 2005, The Use of Control Self-Assessment by Independent Auditors, The CPA Journal, vol.3, pp. 66-92 Heeler, D 2009, Audit Principles, Risk Assessment Effective Reporting, Pearson Press Messier, W Emby, C 2005, Auditing Assurance Services: A systematic approach, McGraw-Hill.