Introduction
Accounting changes encompass the alteration of principles adopted by a firm for accounting, alteration of accounting estimates, and or even changes in reporting entities. Alteration of accounting principles refers to the changing of a methodology for accounting such as the way depreciation of assets and costing of inventories are conducted among others. A change in the costing of inventories may include migration from LIFO to FIFO or weighted average, for instance. Reporting entities take place following mergers or even splitting of firms (Turner & Weirich, 2006, p.24). Accounting changes may also result from restatement of organizations’ financial statements (Aier, et al., 2005, p.125). Telkonet, Inc. is a good example of a publicly-traded company, which announced restatements of its financial statements recently.
Reason for the Restatement
On March 20 this year, Telkonet, Inc. announced its decision to restate its financial accounts. The rationale for doing this was because the consolidated financial accounts that had been audited by the company for the fiscal year that ended on the 30th day of December 2010 coupled with the year 2009 had errors. The errors were thus duplicated in the yearly report issued in form 10K. Additionally, according to Milwaukee (2012), “the interim consolidated financial statements for 2011 and 2010 included in the quarterly reports in the Form 10-Q for the quarter ending on March 31, 2011, June 30, 2011, and September 30, 2011, will need to be restated because of certain adjustments” (p.1). This means that the statements were unreliable. The origin of the errors in the financial statements was traced to “the existence of potential sales tax exposure for which it had accrued $159,000” (Milwaukee, 2012, p.1). However, this fact had been disclosed in the financial statements note R that had been given consideration in the yearly report on the company filed in the Form 10-K for the financial year 2010. Another rationale for restatements was based on the fact that, in the trading period including up to 30 September. 2011, there was under accrual of penalties, interest, and sales tax that amounted to about 815,000 U.S dollars.
Management Responsibility for the Financial Restatement
The announcement of the need to restate financial statements of publicly traded companies induces many concerns among the owners (shareholders) and stakeholders. Therefore, the management has a central responsibility of ensuring that these concerns are resolved so that the owners’ investments in the company remain secure. It is for this reason that Jason Tienor, the CEO of Telkonet, Inc., made an announcement claiming that they were“…fully committed to ensuring the prompt and thorough resolution of these matters and providing their valued shareholders with the most accurate disclosure possible” (Milwaukee, 2012, p.1). Apparently, this was critical since restatements have the consequences of shaking the confidence of the shareholders in a company (Milwaukee, 2012, p.1). At this point, it is important to note that one of the reasons why organizations exist is to create wealth for the shareholders. In case this noble goal is not achieved, for instance, through declining of the prices of stocks due to restatement, the management has the responsibility to assure the shareholders that the company has not derailed from its noble roles of making wealth for them. This argument is reinforced when Jason Tienor asserted, “the restatement and the process leading up to it represent another step in the ongoing efforts to reshape Telkonet and position it for long-term growth and profitability” (Milwaukee, 2012, pp. 1-2). This means that management must deal with the negative impacts of decisions on the restated company’s financial statements.
Possible Changes for the Company’s Leadership Design
From the discussions above, it is clear that the reasons leading to restatements of the Telkonet financial statements are internal controls on sales tax exposures. This results in penalties and accruals of interest. Hence, it amplifies the degree of the erroneous reporting of the financial position of the company in Form 10-K. Therefore, the necessary changes need to be done in the internal controls so that the analysis of the sales tax exposure is conducted and reevaluated before the financial statements are prepared to ascertain the correctness of the computed values of the exposure. Since the sources of errors are not traced from a disagreement of the accounting principles such as the U.S GAAP and IFRS, changes in the accounting principles are unnecessary as measures to prevent reoccurrence of the need to restate Telkonet’s financial statements.
Impact of Trustworthiness of the Company’s Leadership
Where situations of restating companies’ financial statements are warranted, the trustworthiness of the leadership team of a company seeking to do so is compromised (Desai, Hogan & Wilkins, 2006, p.186). It is reasonable and safe to argue that errors do not occur by themselves. There must be some involved staff members due to the lack of adequate knowledge on accounting standards, negligence, and or engagements in some fraud. Surpassingly, the shareholders would not attribute the mistakes to the erroneous accountant(s). Rather, they would blame the leaders whom they have entrusted to run the company on their behalf for failing to prevent the errors from occurring.
Conclusion
Conclusively, accounting changes influence the management and the shareholders in different ways. While the shareholders may have to deal with disadvantages associated with a reduction in stock prices, the management suffers from dwindled trustworthiness. Leaders of organizations thus have a key role of being in touch with every accounting issue pertaining to their organizations in a bid to avoid any possible restatements.
Reference List
Aier, J., Comprix, J., Gunlock, M., &. Lee, D. (2005). The Financial Expertise of CFOs and Accounting Restatements. Accounting Horizons, 17(6), 123-135.
Desai, H., Hogan, C., & Wilkins, M. (2006). The Reputational Penalty for Aggressive Accounting: Earnings Restatements and Management Turnover. The Accounting Review, 1(2), 183-112.
Milwaukee, S. (2012). Telkonet, Inc. Announces Restatement to Prior Reported Financial Statements. Web.
Turner, L., & Weirich, T. (2006). A Closer Look at Financial Statement Restatements: Analyzing the Reasons behind the Trend. The CPA journal, 2(1), 23-25.