By Hajia Kudirat A. Abdul-Hamid
Accounting is a multifaceted discipline of identifying, measuring and communicating an organization’s economic health. The discipline of accounting is best understood when one has strong conceptual understanding of other interconnected disciplines. The other disciplines which accounting is increasingly seen to interact with are: Economics, Mathematics, Statistics, Law and Management. In brief let’s discuss the interrelatedness of accounting, law and the non-existence of one without the other.
2.0 DIFINITION OF TERMS/CONCEPTS DEFINITION OF ACCOUNTING
The American Institute of Certified Public Accountants (AICPA) defines accounting as“ the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of financial character, and interpreting the results thereof”. Accounting: is the measurement, processing and communication of financial information about economic entities such as business and corporations. It refers to the process of summarizing, analyzing and reporting these transactions to oversight agencies, regulators and tax collection entities, business owners, investors, and other stake holders.
DEFINITION OF LAW
Law is the set of rules which a particular country or community recognizes as regulating the actions of its members, which may be enforced by the imposition of penalties. It is a system of rules that a society or government develops in order to deal with crime, business agreements, and social relationships. Law is a rule or set of rules for good behavior which is considered right and important by the majority of people for moral, religious, or emotional reasons. (https- // Merriam – Webster.com/ dictionary) The main sources of regulation which interrelate accounting with law includes: Accounting standards Company law; and For listed companies, the listing rules of the relevant stock exchange. Accounting standards: are authoritative statements of how particular types of transactions and event are reflected in the financial statement. International Financial Reporting Standards are used in Nigeria (IFRS) for Companies while, International Public Sector Accounting Standards (IPSAS) are in use for public sector establishments (Government). Company Law: this is the primary source of company Law in Nigeria. Among other things, it establishes the requirements for financial reporting by all companies in Nigeria. It sets out rules for determining profit available for distribution, issuing and redeeming share capital, the reserves that a company must have etc. The main company law status in Nigeria is Companies and Allied Matters Act (CAMA) 2004 as amended.
3.0 THE INTERRELATEDNESS OF THE SUBJECT MATTERS
Accounting is interrelated with law, as it operates within a legal environment. Thus, all the transactions are governed on the basis of different Acts. Business organizations are governed by their respective statues that provide many aspects pertaining to the preparation of accounts. However, it’s likely that accounting influences law and is also influenced by law. In this way, accounting is also related to law because of the variety of many legal aspect and procedures. Accounting is guided by regulatory frame work and it is regulated by law particularly Business /Commercial Law. The relationship between accounting and law reveals itself in many forms as company law consists of detailed rules. Accounting standards may be rules based or principle-based. International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) are mainly principles based, or a mixture of both rules and principles. This clearly show the interrelatedness of accounting and law. Nigeria has a regulatory system in which company and business law deals with specific matters. For instance the Sales of goods Act, Insurance law, Hire purchase transactions, Agency, partnership Act, 1890, Banking Laws Bank and other financial Institution Decree (BOFID) No. 25 of 1991, Central Bank Decree No. 24 of 1991 which repealed the Central bank of Nigeria (CBN) Act of 1958. This was effectively an effort to ensure they fit between the CBN Act and the general Bank and other financial Institution (BOFID). All these laws/Act are interrelated and complement the accounting principles and standards in terms of preparation and presentation of financial statements.
4.0 THE INSEPRABLE LINK AND NON_EXISTANCE OF ONE WITHOUT THE OTHER
In a report presented to the Essex County (New Jersey) Bar Association by a joint committee of lawyers and accountants, the following were noted as examples of interrelatedness of activities requiring the services of both accountants and lawyers:
(1) Planning the type of legal entity to conduct a new business, having in mind the subject of Federal, State, and Local Government taxes.
(2) Upon incorporation of businesses, the opening of books of account and installation of accounting software.
(3) Problems involved in the dissolution of partnerships and corporations.
(4) Problems involved in the consolidation, merger, acquisition and reorganization of corporations.
(5) Determination of extent of damages and profits in patent and other infringement suits.
(6) Determining losses covered by fire insurance policies and preparation of proof of claim.
(7) Matters arising in receivership and bankruptcy cases, including Examination of books and records of the bankrupt and an analysis of Financial statements.
(8) Determination of rights of life tenant and remainder man, especially with regard to distribution of corporate dividends.
(9) Income tax matters, including presentation of cases before the Commissioner of Internal Revenue and before the Tax Appeals Tribunals. Example Self assessment done by tax payers.
(10) Preparation of registration statements for the Securities and Exchange Commission etc. (see Byerly, Relationship between the practice of Law and Accounting 1998). In addition, other areas of interrelatedness of accounting and law are:
(a) The preparation or interpretation of lease contracts, particularly where valuation of property or the determination of income is involved, or where there are lease security deposits.
(b) Problems relating to the declaration of dividends.
(c) The preparation of documents creating trusts, either living or Testamentary.
(d) Preparation of evidence for presentation in court where accounting records constitutes an important part of the evidence (Forensic Audit).
(e)The preparation of uniform legislation, particularly where it affects the interpretation of such terms as earned surplus, capital surplus, stated capital, dividends, insolvency, and many other matters which relate to both accounting and law. (Journal of Accounting the North Carolina review 2003) Furthermore, financial transactions recorded in books of accounts are affected by law in the sense that in so many cases, accounting data must comply with the requirement of a particular enactment. In the case of Nigeria For instance, there is no statutory obligation upon sole proprietorship or partnership firm to prepare final accounts. Whereas, Joint stock companies have a statutory obligation to keep accounting records and to prepare financial statements as required under Section 331 and 334 of Companies and Allied Matters Act (CAMA) 2004 as amended. For instance; Duties of a Director Section 305 (3) duties of a director as amended “shall have regard to the impact of the company’s operations on the environment in the community where it carries on business operations”. Thus, there is now a codified requirement for Directors to be conscious of the community and environment in areas where the company carries out business. This provision is most welcome and long overdue, considering the fact that environmental issues are fast taking the front burner in the global business community and businesses in the 21st century are proffering ways of conducting their activities in more environmentally friendly manner. Additional Financial Statements Section 375 (2) makes provisions for additional financial statements required to be prepared by the directors of a company in respect of each year of the company. These additional statements include a statement of cash flow as an alternative to a statement of the source and application of fund; and changes in equity. These essentially align with International Financial Reporting Standards. (www.Nigeria Law.org / Companies and Allied Matters Act) as amended. More so, accounting is interrelated with law in area of forensic accounting and auditing.
The Forensic accountants are often engaged to quantify damages in instances related to fraud and embezzlement as well as on matters involving insurance, personal injury, business disputes, business interruption, divorce and marital disputes, construction, environmental damages, cyber-crime, products liability, business valuation and many more. The investigation is likely to ultimately lead to legal proceedings against one or several suspects. The lawyers and accountants who are members of the investigative team must be comfortable with appearing in court to explain how the investigation was conducted, and how the evidence was gathered. “It has been my observation however, that training in the elements of bookkeeping and accounting are very valuable to a lawyer. Many at times, I noticed from experience that, the lawyer who is familiar with books of account has a greater advantage over an opponent unfamiliar with such matters. In fact, so much of the litigation which is profitable to the lawyers, requires the examination of books of account that all lawyers who accept to trial cases ought to possess knowledge of Accounting.” “Accounting is especially valuable in the examination of witnesses in the trial of cases; also for the understanding of a client’s business and business problems.” For instance, in the field of the patent law:
(i) Deals of all kinds for the manufacture and articles for sale, machines, etc. Whether on a royalty or other basis, requires a thorough understanding of accounting and law.
(a) For the negotiation of the deals, and
(b) for the drafting of definite, certain and workable contracts; and
(ii) In connection with recoveries for infringement, a large body of law has been built up, which is generally referred to as “the law of patent accounting”. The recovery is absolutely dependent upon knowledge of accounting, and such knowledge is necessary to the application of the law itself. This has special reference to Cost Accounting and to such items as the proper classification of law and accounting terms of cost and the spreading of overheads, as well as such items as depreciation and depletion. The lawyer whose practice includes any substantial amount of advisory work for business enterprises, whether corporations or partnership, has frequent need for the ability to understand and analyze financial statements. These statements clearly indicate the relationship between law and accounting. One explanation of the interrelationship between these Two (2) fundamentally dissimilar decipline was presented by (A. A. Berle, Jr. and Frederick S. Fisher, Jr. Journal of Accounting, North Carolina, law review 1993). After exhaustive research to determine the extent to which the courts have undertaken, to impose rules of accounting as rules of law: “Every day, lawyers and courts predicate legal effects on the results of accounting. It may fairly be said that rules of accounting are for many purposes rules of law or conversely that rules of law entail rules of accounting”. The respective tasks of a lawyer and accountant here intermingle so closely that neither can proceed without the other. To a much larger degree than perhaps either profession realizes, this intermingling has already taken place. Courts have in fact and in form laid down rules which bind the accountants, or they have themselves adopted accounting conventions.
Once these rules of account have found their way into the body of law, it becomes legally obliged to be followed. Not only do the courts adopt and lend sanction to accounting principles as exemplified in accounting practice.
From the foregoing, there is practically a universal agreement amongst practicing lawyers, that the services required of the lawyer today (outside of a very few specialized fields) demand a certain amount of accounting training for most competent performance. Therefore, simultaneous consideration of the legal and accounting aspects of certain problems, may suggest the necessity of important modification of accounting practice in order to reflect the results of the legal rules. There are undoubtedly many other points at which lawyers and accountants should unite their activities in the endeavor to render to clients a service which is complete, adequate and satisfying for the specific purpose at hand. However, the examples listed in this discussion constitute a fair sample, and in themselves offer substantial proof of the interrelatedness of Accounting, Law and the non-existence of one without the other.
Thanks for your attention and God bless you.
HAJIYA KUDIRAT A. ABDUL-HAMID AUDITOR-GENERAL FOR FCT AREA COUNCILS