2.2.1.3 The SOCIAL IMPACT of accountancy professionals - practical application

The major role of accountancy professionals is to contribute to the preparation and distribution of reliable financial information and reports, including costing and financing calculations, accounting records, annual financial statements, internal and external audit reports and tax returns.

Stakeholders (including `shareholders, managers, investors, potential investors, trade unions, creditors, the receiver of revenue, and others) base their decisions and actions on the financial information and reports that accountancy professionals play a role in.

How will these stakeholders and society be influenced by reliable (true and fair) compared to misstated (inaccurate or wrong) financial information and reports?

Reliable reporting

Misstated (incorrect) reporting

Management uses reliable compared to misstated financial information and reports

Decisions and actions of management are likely to be appropriate - meaning in the best interest and good of the company and all users of the financial information and reports

Decisions and actions of management are likely to be inappropriate - meaning not in the best interest of and bad for the company and all users of the financial information and reports

Shareholders (investors), new investors and other stakeholders (for example creditors) use reliable compared to misstated financial information and reports

Decisions and actions of these users of the financial information and reports are likely to be appropriate meaning in their best interest or good for them

Decisions and actions of these users of the financial information and reports are likely to be inappropriate meaning not in their best interest or bad for them

Impact on company, its shareholders and employment levels when management uses reliable compared to misstated financial information and reports

The company achieves its objectives it makes profits and expands, causing an increase in the capital value of the company, meaning more dividends can be paid to shareholders

Investor confidence in the management of the company grows meaning the company can easily obtain funding for expansions

Company growth and increasing profits fund salary increases and more staff positions in the company

The company could stagnate, lose market share, or collapse totally, causing a loss in the capital value of the company and a decrease in or suspension of dividend payments to shareholders

Investors lose confidence in the management of the company meaning the company finds it harder to obtain funding for expansions

As the company stagnates and makes smaller profits, the number of staff posts declines, and salaries stay fixed, or pay cuts must be implemented

Impact on creditors when management uses reliable compared to misstated financial information and reports

Company growth is likely to improve its liquidity making full payments to creditors on due date possible healthy creditor relationships enable the sourcing of more credit in support of increasing company growth

As the company is unsuccessful, cash is short meaning payables to creditors become overdue. Creditors may demand payment on a cash-on-delivery basis which would strain company growth further

Impact on the South African Revenue Service (SARS) when management uses reliable compared to misstated financial information and reports

As the company is successful, growing profits, salaries, dividends, and sales translate into the payment of more taxes, benefitting the budget of the State

As the company is unsuccessful, declining profits, salaries, dividends, and sales translate into the payment of less taxes, tightening the budget of the State

Impact on society when management uses reliable compared to misstated financial information and reports

The increase in taxes paid to the State funds infrastructure investment, related employment opportunities, and spending on social needs = a more prosperous society

The decrease in taxes paid to the State prevents infrastructure investment, limits employment opportunities, and decreases spending on social needs = a less prosperous society

The table explains how the role of accountancy professionals in preparing, issuing and auditing reliable financial information and reports is key to the well-being of society. When financial information and reports are misstated, companies may collapse; these collapses are often called accounting scandals. Some examples of accounting scandals that have occurred over the past two decades include, Enron in the United States of America, Parmalat in Italy, and Steinhoff, VBS Bank, EOH and Tongaat Hulett in South Africa. Using Study unit 2.2.1.3, in one or two full sentence(s), describe ONE real-world end-result of the impacts in B1.5. Impact 1: Stakeholders decision and actions are likely to have negative economic IMPACTS for themselves as they would be relying on incorrect information provided by auditors. Impact 2: Society may suffer due to the negative economic and social IMPACTS from decisions and actions of business and government who relied on incorrect information provided by auditors.