Accounting Differences That Are Essentially of Relevance to Management

INTRODUCTION

Background

When you hear of the word 'difference', there is naturally an impression that comes through the mind of an individual. The impression is that of a factor that causes a shift from the normal. A shift from the normal in the sense that, it connotes that something unusual from the normal has taken place. This difference could either be of addition or of subtraction. This study goes to narrow itself only to differences that causes imbalances in the financial affair of a business going concern which could be of great concern to users of accounting information with particular reference to management.

The importance of management can never be overemphasized in the daily affairs of the running of an entity. This is as a result of the function it plays in the day to day administration of a business. Some of the functions of the management is to properly harness the various factors of production and distribution that is required of a going concern to sustain its existence; which are Land, Capital and Labour. These mentioned factors specifically require the management of a capable business manager to properly manage in other to get the desired profit making goal which an entity is originally established to attain. In the regards of managing an entity, the duties and responsibilities of the management is so enormous such that it has to break itself into bits and constitute different departments headed by a supervisors to help monitor and oversee the affairs of the business so as not to allow for lapses. These supervisors are charged with the responsibilities of reporting to a superior head which could either be the all-in-all (proprietor) or could either be the next to transmit the findings of other supervisors to the owners of the business which could sometimes be the Board of directors or the shareholders themselves, depending on the structure of the organization.

It is equally the duty and responsibility of the Business manager to be able to gather facts and figures emanating from the day-to-day financial running of the business to be able to make result oriented and informed decisions as regards the future of the entity if it is to remain a going concern for long. Some of these differences could be either significant or insignificant. However, this research seeks to look at these differences from eight different perspectives.

SYSTEMATIC DIFFERENCES

These are differences occasioned by some systematic underlying causes. Causes may arise where differences may not be large enough to be individually meaningful to the company, they may become significant if accumulated or aggregated over time. Hence, it is common for managers, auditors and users of accounting information to track the aggregated amount and directions of differences. For example an interest rate of 24.95% against an interest rate of 25% could be argued by a customer who pays zero tolerance to the most insignificant difference to be the same as 25%, whereas a customer who sees the importance of the smallest difference in a long run to be significant would realize that the 0.5% difference could be of great difference when accumulated in a long run. If it is established that the differences are systematic, it is easier to find the root cause. If the root cause is determined, then the solution is just around the corner.

MATERIAL DIFFERENCES

These are differences that have dire and significant consequences to the financial statement. They are considered too obvious to the eyes of users of accounting information. This is as a result of its significance to the overall report. These types of differences are particularly significant to management. They are treated as very important due to the effect it could cause if its cause is not properly tamed on time. It is considered material due to its effect of the entire financial report. Steps are however advised to be taken in this regards to nips its effects in the bud. When an accounting error changes the interpretation of the company's results, it is important for management to quickly correct the error in a timely manner. In most cases it is advisable for the entity to reissue a restated version of its financial report.

UNEXPLAINED DIFFERENCES

Situations equally arise at times where some differences could occur without any explanation. These types of differences are of concern to management due to its venomous consequences in a long run when the cause of such an error that is more than inconsequential cannot be determined. In this regards, management is advised to conclude whether the error is an isolated occurrence (one-off) or if more undetected accounting differences could be embedded in the company's financial statements. This is however considered a Herculean task when the main or original difference cannot be explained. In this situation, management is encouraged to attempt to determine the maximum amount of possible error with the help of statistical techniques and solutions.

DIFFERENCES OCCASSIONED BY FRAUD

Fraud related issues are treated as very important when it occurs due to its very damaging characteristics. Accounting fraud either relates to fraudulent financial reporting or to misappropriation of assets and liabilities of the business entity. Management however treat as very important any accounting differences no matter how infinitesimal it may appear. If such issues are given zero tolerance, it could go a long way to being of significant advantage to management and the business by extension. Fraudulent financial declaration involves the intentional manipulation and distortion of company's financial records or financial report with the intention of misleading and covering up for some crimes or deficiencies. I.e. theft or misuse of company's resources. It is necessary that managers or users of financial reports demands to be more concerned about the differences that could arise from fraud as such differences could be a symptom of bigger problems to occur which could damage the corporate existence, culture, reputation, and integrity of such entity. This could also cause the company to violate the laws and regulations that establishes its incorporation. The end product of such could be outright withdrawal of operating license.

BANK RECONCILIATION DIFFERENCES

Situation arises where differences are necessitated by bank reconciliation related instances. For example deposit in transits and outstanding cheques could bring about conflicting figures in the books of accounts of an organization. A situation where what is recorded in the organization's books is a sharp contrast from what is obtainable from the records in the bank. These however are not differences with the intent to commit fraud. It is only a mis-normal which requires urgent steps to be taken to correct. However, if a deposit is made to the bank some time ago and still hasn't showed up in the bank's statements, management has a serious issue at hand. It means that the bank may have lost a deposit or made another mistake. In this situation, the likelihood of intent to commit fraud can not be completely ruled out as the deposit may have been diverted (stolen) before it reached the bank.

BUDGET RELATED DIFFERENCES

Variances in budget and actual numbers could equally be a major difference encountered by modern day managers when trying to balance the book of accounts. These differences are of grave importance to management especially if the difference is of large consequence. A budget can be described as a skeletal framework that a business is expected to follow to operate, reflecting the plans and strategies of the management for a certain period. Budgets are usually drafted on periodic basis. Management should learn to take with great concern when there is a contrast in actual revenue or expenses from the budget. For example if there short fall emanating from revenue from its expected, resulting in large variances, it is expected of management to cut down their expenses as quickly as possible.

ACCOUNTING MODULES RELATED DIFFERENCES

Computerization of accounting processes could bring about a conflict between accounting modules and the general ledger. This could be occasioned by wrong posting. For example, account payable or receivable module may show a total number that's different from the on in the general ledger. These differences are often as a result of journal entries made of the general ledger and not reflected in the module or they could be as a result of technical hitches that prevented posting in the general ledger. These are possibilities that can not be ruled out in the practice of accounting. However a corrective action plan for such an anomalies could require huge adjustments to the general ledger and in reports which are often relevant to managers who may require the assistance of the computer experts to resolve the problem or to set up an alternative procedure to ensure that such problems do not occur again in the future. The consequences of differences occasioned by this could be very disastrous in nature if not properly managed on time.

INVENTORY

These types of differences are prevalent in manufacturing firms. Inventories could bring about differences if not properly managed by a store keeper. It is however advised that management conducts physical inventory count or stock taking on periodic basis and compare that with the numbers in the accounting system. Any significant difference observed between the physical count and the numbers in the books should be reviewed properly by management to nip issues in the bud. Theft could be a possibility when the number items in the store house are fewer than those in the accounting system. This also can equally be occasioned by damaged items or other form of losses. The reason for variances must be properly established in other to be able to monitor obnoxious trends. A situation where the count shows more items than what is in the accounting system, could be a signal that items haven't actually been properly recorded in the system as it ought to have been or that there where returns that were not properly declared in the system.

RECOMMENDATION

It is advisable that all differences should be treated as very important no matter the size or effect on the financial statement. Efforts are however encouraged by management to be adopted to nip the ugly trend in the bud so as not to lead the organization into crisis. There must be a workable correct and preventive action plan put in place to forestall irregularities. The management should equally try and much as possible not to let their operations to be to cumbersome in nature and easily understandable by all and sundry involved in the success of the business as it has been established over time that lack of understanding of how a system or process operates have led to personnel doing what ought not to have been done which could amount to graves consequences in the long run.

Management is encouraged to avoid using instruments with technical deficiencies. E.g. Computers, Calculators etc. This could be a major factor in distorting facts. Once a working tool is considered not usable, or if its continuous use could bring about factual inefficiencies, it is advised that management disposes it off in other to work within the ambit of the required Service Level Agreement (SLA).

Advisable as well is for management to place in sensitive areas trustworthy individuals who would see themselves as trustees to the organization and hold integrity paramount especially in the accounting, procurement, store, sales and purchase department of any organization.