GAAP rules are clear about when a company needs to consolidate or not, but companies tend to find loopholes to circumvent this rule. GAAP clearly indicates that consolidated financial statements are usually necessary for a fair presentation when one of the companies in the group directly or indirectly has a controlling financial interest in other companies: the usual condition for a controlling financial interest is ownership of a majority voting interest.
Controlling financial interest means to own more/greater than 50% of the voting stock of another company.
Because of this greater than 50% of the voting stock, some of the companies have taken advantage of the criterion, causing serious problems in the business world. Companies were destroyed and with it, employees lost their jobs, their pensions, and 401Ks. So FASB had to make changes to GAAP for consolidations and issued new guidelines.
As a student of accounting, you must know these rules. Please research and discuss the new guidelines issued by GAAP for consolidating entities.
Give an example of a company that was involved in this kind of unethical behavior.
Sample solution
Dante Alighieri played a critical role in the literature world through his poem Divine Comedy that was written in the 14th century. The poem contains Inferno, Purgatorio, and Paradiso. The Inferno is a description of the nine circles of torment that are found on the earth. It depicts the realms of the people that have gone against the spiritual values and who, instead, have chosen bestial appetite, violence, or fraud and malice. The nine circles of hell are limbo, lust, gluttony, greed and wrath. Others are heresy, violence, fraud, and treachery. The purpose of this paper is to examine the Dante’s Inferno in the perspective of its portrayal of God’s image and the justification of hell.
In this epic poem, God is portrayed as a super being guilty of multiple weaknesses including being egotistic, unjust, and hypocritical. Dante, in this poem, depicts God as being more human than divine by challenging God’s omnipotence. Additionally, the manner in which Dante describes Hell is in full contradiction to the morals of God as written in the Bible. When god arranges Hell to flatter Himself, He commits egotism, a sin that is common among human beings (Cheney, 2016). The weakness is depicted in Limbo and on the Gate of Hell where, for instance, God sends those who do not worship Him to Hell. This implies that failure to worship Him is a sin.
God is also depicted as lacking justice in His actions thus removing the godly image. The injustice is portrayed by the manner in which the sodomites and opportunists are treated. The opportunists are subjected to banner chasing in their lives after death followed by being stung by insects and maggots. They are known to having done neither good nor bad during their lifetimes and, therefore, justice could have demanded that they be granted a neutral punishment having lived a neutral life. The sodomites are also punished unfairly by God when Brunetto Lattini is condemned to hell despite being a good leader (Babor, T. F., McGovern, T., & Robaina, K. (2017). While he commited sodomy, God chooses to ignore all the other good deeds that Brunetto did.
Finally, God is also portrayed as being hypocritical in His actions, a sin that further diminishes His godliness and makes Him more human. A case in point is when God condemns the sin of egotism and goes ahead to commit it repeatedly. Proverbs 29:23 states that “arrogance will bring your downfall, but if you are humble, you will be respected.” When Slattery condemns Dante’s human state as being weak, doubtful, and limited, he is proving God’s hypocrisy because He is also human (Verdicchio, 2015). The actions of God in Hell as portrayed by Dante are inconsistent with the Biblical literature. Both Dante and God are prone to making mistakes, something common among human beings thus making God more human.
To wrap it up, Dante portrays God is more human since He commits the same sins that humans commit: egotism, hypocrisy, and injustice. Hell is justified as being a destination for victims of the mistakes committed by God. The Hell is presented as being a totally different place as compared to what is written about it in the Bible. As a result, reading through the text gives an image of God who is prone to the very mistakes common to humans thus ripping Him off His lofty status of divine and, instead, making Him a mere human. Whether or not Dante did it intentionally is subject to debate but one thing is clear in the poem: the misconstrued notion of God is revealed to future generations.
References
Babor, T. F., McGovern, T., & Robaina, K. (2017). Dante’s inferno: Seven deadly sins in scientific publishing and how to avoid them. Addiction Science: A Guide for the Perplexed, 267.
Cheney, L. D. G. (2016). Illustrations for Dante’s Inferno: A Comparative Study of Sandro Botticelli, Giovanni Stradano, and Federico Zuccaro. Cultural and Religious Studies, 4(8), 487.
Verdicchio, M. (2015). Irony and Desire in Dante’s” Inferno” 27. Italica, 285-297.
Sample Answer
Sample Answer
Understanding GAAP Consolidation Guidelines and Their Implications
Introduction
Generally Accepted Accounting Principles (GAAP) play a critical role in ensuring transparency and consistency in financial reporting. One of the most significant aspects of GAAP pertains to the consolidation of financial statements, particularly concerning companies that hold a controlling financial interest in other entities. However, there have been instances where companies have exploited loopholes within these guidelines to manipulate financial reporting, leading to dire consequences. This essay will explore the updated GAAP guidelines for consolidating entities and provide an example of a company that engaged in unethical behavior related to these rules.
Updated GAAP Guidelines for Consolidation
In response to past abuses and the need for clearer financial reporting, the Financial Accounting Standards Board (FASB) introduced several enhancements to GAAP concerning consolidations. The most notable changes, articulated in ASC 810, emphasize the following key principles:
1. Control as the Sole Determinant
The updated guidelines assert that control—not merely ownership—is the determinant for consolidation. Control is defined as the ability to direct the significant activities of an entity, which may not solely be derived from owning more than 50% of the voting stock. This shift recognizes that control can also exist through contractual arrangements or other means, allowing for a more nuanced approach to consolidation.
2. Variable Interest Entities (VIEs)
The FASB introduced specific provisions for Variable Interest Entities (VIEs) to ensure that entities holding significant risks and rewards are consolidated even if they do not meet the traditional ownership threshold. Companies must assess whether they are the primary beneficiary of a VIE based on their power to direct activities and their obligation to absorb losses or receive benefits.
3. Enhanced Disclosure Requirements
To promote transparency, FASB’s updates require companies to provide detailed disclosures regarding their involvement with subsidiaries and VIEs. This includes information on how control is established, risks associated with non-consolidated entities, and any potential impacts on financial statements.
4. Reevaluation of Control
Companies must regularly reevaluate their control over subsidiaries and VIEs, especially when significant changes occur in ownership structures or governance. This ensures that financial statements reflect the current realities of control relationships.
Case Study: Enron Corporation
One of the most notorious examples of unethical behavior related to consolidation is the Enron scandal. Enron Corporation, once a highly regarded energy company, used complex financial structures and accounting loopholes to manipulate its financial statements and hide debt.
Key Issues:
– Special Purpose Entities (SPEs): Enron created various SPEs to keep significant liabilities off its balance sheet, allowing it to present a healthier financial position than reality suggested. The company maintained control over these entities while not consolidating them into its financial statements.
– Misrepresentation of Financial Health: By not consolidating these entities, Enron was able to report inflated earnings and stock prices, misleading investors and analysts.
– Collapse: The eventual exposure of these practices led to Enron’s bankruptcy in December 2001, resulting in thousands of employees losing their jobs, pensions, and savings.
Consequences
The fallout from the Enron scandal prompted significant regulatory changes, including the Sarbanes-Oxley Act of 2002, which aimed to increase transparency in financial reporting and hold executives accountable for fraud.
Conclusion
The updated GAAP guidelines regarding consolidations reflect a necessary evolution in accounting practices aimed at promoting transparency and accuracy in financial reporting. By emphasizing control over mere ownership and introducing stricter regulations for VIEs, FASB has taken steps to prevent unethical financial practices that can lead to catastrophic outcomes for companies and employees alike. The Enron scandal serves as a poignant reminder of the potential consequences of exploiting loopholes in accounting standards and underscores the importance of adherence to ethical practices in the business world. As accounting students, understanding these guidelines is crucial for fostering integrity and trust within financial reporting systems.
