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The Effectiveness of the Sarbanes-Oxley Act of 2002 in Detecting Fraud during the Audit Process
The Effectiveness of the Sarbanes-Oxley Act of 2002 in Detecting Fraud during the Audit Process
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Table of Contents
Page
a) Introduction…………………………………………………………………………………..3
b) The Problem……………………………………………………………………………………………………………….2
Research questions ………………………………………………………………………………………………4
Statement of problem……………………………………………………………………………………………4
Assumptions……………………………………………………………………………5
Importance of the Study……………………………………………………………………………………….7
c) Literature Review………………………………………………………………………………………………………10
e) Research methodology…………………………………………………………………………14
Research Hypothesis…………………………………………………………………………………………….15
f) References …………………………………………………………………………………………………………………17
Introduction
Auditing in this concept means the main activity of the certified public accountant, and entails a separate examination of accounting statements, the interior control system and other proof to support the expression of an impartial expert opinion concerning the financial statements reliability. Financial statement according to this paper will be used to mean the mean through which accountants pass information to users. The financial statements can either be unaudited or audited, depending on what is needed from the corporation, and entail the balance sheet, the income or profit and loss statement, the statement of cash flows, subsidiary notes, and detailed schedules, when necessary (MorBarak, 2005).
The word fraud will be used to mean the dishonesty intentionally practiced to protected unlawful or unfair gain. It is also considered the deliberate misrepresentation of a material present fact made by an individual to another when in fact he or she is fully aware that the claim is wrong. According to Albrecht 2001, financial statement fraud is regarded as a deliberate attempt by individuals or organizations to mislead or trick users of in print financial statements, particularly creditors and investors, by arranging and propagating materially misstated financial statements. Reports on financial statements or accounting information should always be done with reference to the accounting standard which means that the preparation of an accounting report on the financial status of a company or a firm should be done on the accounting standards that are widely accepted. Accounting standards surround all the factors that are concerned with the authoritative support that is considerable in standards of accounting (Albrecht, 2001). The detection and fraud prevention during the audit process is significant in the financial candle light for most organizations.
Research questions
The main aim of this research is to determine the effectiveness of the Sarbanes-oxley act of 2002 in detecting fraud during the audit process. This would entail numerous aspects of the question one being to address whether or not SOX addresses accounting and auditing revisions by both private and public companies. The other aspects that will be addressed in whether or not SOX should revised t make it more efficient or whether it should be discarded as ineffective.
The response to the main research question of whether SOX is efficient can be affirmed by the legislative, judicial statistical analysis, and reporting enforcement actions. The research described herein, if completed, would have fully determined the effectiveness of SOX not only to ascertain if or if not the legislation is fulfilling the purpose of preventing and detecting fraud during the audit process, but the research aims also at establishing suppose adjustments are needed or necessary to enhance the usefulness and achievements of SOX (Pettinger, 1999). The lack of information about the effectiveness of the SOX might lead to increase in occurrences of frauds.
The study will also contribute to answering the question suppose enforcing SOX is worth the other related issues that have arisen since its formation. One of the issues that will be determined is whether the legislation has contributed to the rising costs, and specifically the internal control standards of SOX.
Through the research, the other question that will be answered is whether SOX affect the legislation of foreign companies. This is in regard to the diminishing number of the foreign companies listed in the stock market from 2003. For example, in 2003, only 19 non-American companies were listed but in 2000, 50 were listed.
Fraud detection by independent auditors is an important requirement to emerge from the recent corporate scandals. Kramar 2000 agreed that auditors must do more to discover fraud, which is what the public needs, and that audits reduce the probability of occurrence of fraud by a significant value. To detect fraud, Lawrence 2001 says that auditors should practice professional skepticism during an audit, and that the audit personal should be knowledgeable, skilled, and well-trained so that fraud can be recognized and the fraud risk determined. Auditors should also be wary of questionable accounting principles utilized by management, to ensure that the interior control system is adequately effectual to prevent and detect fraud occurrence probability. When fraud is detected, the audit steps should be obtained more reliable audit evidence, and include extra audit closer to the end of the audit year. Kinzel 2005 details some of the keys the auditor can use to detect management of the financial statements manipulations. The keys as he highlights are; the examination of the extent of the changes in account receivable and accounts payable that do not respond with company and industry trends, comparing inventory turnover and trends within the industry, examination of the controls over inventory, and examination of the contingent liabilities for feasibility.
Statement of problem
Has the legislation contributed to the rising of the internal control standards of SOX?
Does SOX affect the legislation of foreign companies?
Is SOX fulfilling the purpose of preventing and detecting fraud during the audit process?
Are there any adjustments required to enhance the usefulness and achievements of SOX?
Assumptions and strengths
One of the assumptions that will be made is that the enforcement and financial statement restatement data used in the research enough and of great relevance to the study to answer all the research questions and validate the conclusions. The sampled centers or institutions will be enough to provide all required information. The data that will be obtained during the research will be sufficient to determine the effectiveness of SOX. Due to the high reliability and validity issues in sampling, data collection and data analysis, the analysis will provide enough and consistent response to point to a single result, and any diverging result will be of no importance as long as majority of the data point to one thing.
The research is also expected to point out the present outcomes of SOX and suggest various method of improving SOX. Various viewpoints will also be employed to enhance the accuracy and relevancy of the collected data and this will adds strength to the conclusions made. The other assumption is that the data that will be collected during the research will be valid and the respondents will be as accurate when providing the data as possible and the results that will be obtained will truly reflect the actual case.
Kabala 2005 points out relevance to fraud auditing which states that the majority of fraud occurrences are either not reported or not discovered. He placed fraud into three categories. According to him, the first grouped composed of fraud that has been detected and known by the public. The second group is a fraud that has bee detected, but the concerned personal has chosen to hide it for various reasons and so not know by the public. The last group is a fraud that has been detected and is known by the public. Hellmann 2005 gives estimation that about 25% of fraud is a group one fraud, while 42% is a group two fraud. The detection of the financial fraud can be detected through audit process. This is because auditing is more concerned with the transactions that compose the balance in account, and not just the balance itself. He claims that minus the fraud auditing, “internal controls neither are nor effective, especially when two or more perpetrators are involved” (p. 8).
Proactive fraud is hard since it needs auditors to institute search procedures to detect fraud in circumstances where there is not evidence to show that fraud can exist. However, most auditors are not trained in fraud auditing or fraud detection, and do possess sufficient knowledge of evidence and its collection. Hesketh 2006 assert that proactive fraud auditing is not generally done because no generally accepted auditing standards or accounting principles have been developed to use a guide for the auditors. The contention of the authors is that such standards and principles should be written so that auditors are prepared to prevent and detect fraud through such auditing methods (Hesketh, 2006). In investigating suspected fraud, interviewing of key workers is very essential, as well as efficient note-taking and the recording of written statements, when necessary. Sufficient evidence must also be collected to purse any action taken against the perpetrator(s).
Importance of the Study
The examination of SOX is very important, considering that legislation is the most recent of SOX is therefore to this most recent problem. The examination of SOX and determination of its effectiveness in detecting and preventing fraud during the audit process is of utmost importance. Hartmann 1998 suggested that a good economy is normally hiding the problems that companies are experiencing, creating more of an incentive to “cook the books”. He also noted that the use of stock options as earnings for company executives is encouraging the executives to manipulate financial statements to come up with higher stock prices.
The significance of the research in determining if or not SOX has been effectual in detecting and preventing fraud will be mostly to check whether SOX has been effective. Suppose the SX result are insufficient, then the study would assist in determining if it is to be supplemented, or if an alternative solution needs to be implemented in its place. The study will also examine whether the existing programs supporting SOX like Securities And Exchange Commission (SEC) are capable of regulating the auditing filed effectually through the use of SOX, and suppose the result will show that it has been ineffective, then other method would be recommended base on the analysis of the auditing department of various organizations that will be examined (Nankervis and Compton, 2008).
The research will also be beneficial to numerous organizations and individuals. Certified Public Accountants will benefit from the study as it will help them in assessing the effectiveness of SOX, and in determining if other steps will be necessary so that they can prevent and detect fraud in the audit process. Companies and corporations will also be beneficiaries of the research outcomes. SOX in the past, has caused extra costs by corporations in order to comply with the internal control standards imposed by SOX. According to Fleetwood 2006, all officers of organizations, whether public or private, may be affected by the new standards of SOX.
The investor will also benefit from the program. This will be in finding out whether or not SOX is protecting their interests. A poll of investors, done in 2003 by Dowling shows that investors confidence is closely aligned with companies’ compliance with SOX. Three out of five investors believed that SOX assists in protecting their stock investments. However, the rest totally disagreed. It would behoove the investors to read and study and be informed as to how effective SOX actually are in prevention and detection of fraud in the audit process.
In accounting, the financial status of a business is a very vital issue that should always be handled carefully since it is the backbone of a business and this means that a business without a strong financial management is not competent in competitive market in the modern world thus effective decision making in the business. Financial accounting should not be done with reference to what a single worker plays his role in a business but it should be done as a combined effort of all the members in the managerial sector of a firm or a company thus it should be decided by all the members. Financial accounting again is not performed without following the principles of accounting that is generally accepted and it should always follow the guidelines of accounting (Jackson, 2003). Working as an accountant is not an easy thing because it requires someone who is professionally trained as an accountant. With this information, it is of great significance to monitor and effectively manage the present SOX.
Strategic human resource management (SHRM) generally refers to a managerial process that is comprised of human resource practices and policies which are linked to the strategic objectives of the alleged organization. The past decades has witnessed human resource practitioners and researchers shifting their attention towards addressing vital issues such as fraud, the factors that determine the kind of strategic approach that an organization should adopt and the ways in which these strategies can be practiced (Aldrich, 1999). Moreover, a lot of Human resource research exercises have been geared towards discovering the impact of Strategic human resource management on the overall organizational performance. The study will be useful as the mangers will be able to detect and determine the magnitude and the extent to which fraud can affect their respective organizations and the possible methods for its detection and prevention.
Donald 2005 suggest changing audit procedures in order to detect fraud, audits should be conducted using the bigger picture or from a wider view perspectives. Employee fraud is normally for individual gain and does not result in fraudulent financial statements, while management fraud is usually for the purpose of falsely improving the appearance of the financial condition of the organization, which is considered fraudulent financial reporting. Management fraud is very hard to detect and prevent. The three characteristics of fraud that are usually present are
Perpetrators of fraud always have a reason for committing the fraud
The opportunity to commit the fraud presents itself
In the mind of the perpetrators, the perpetrators can justify the crime (Pawan, 2004)
When the client has an effective internal control system, and the auditor can assess the risk of the client, understand the business and industry of the client, utilize analytical procedures, and redesign the workplace of the auditor to help assess the risk of fraud, then the auditor can more effectively prevent and detect fraud in the financial statements of the client.
Literature review
Frauds lead to risks in organizations. A risk can be described merely as a hazard. It however can be described in more depth as a deviation of the results received of the future expected results. Risks are a part of activities that humans engage in. Enterprises are more prone to frauds and the managers of these enterprises have to manage these frauds in different ways. Risk management is the process of dealing with the risks that come in hand. Enterprise identity management systems are usually used with information technology based systems and enterprises. According Daniel 2004, this system is used to manage risks in enterprises because of its efficiency and the method that it uses to control the risks. It takes into consideration the costs and the benefits of managing risks in an organization and it also considers the setting of the organization. Identity management is important in managing risks in an enterprise because of its strong variables which include authorization, compliance, and authentication and user management. A viable risk management strategy must therefore include an identity management process because it helps in authorizing the users of any enterprise data and information system to avoid any breaches or hacking (Brewster & Vernon, 2007). The identity management process will validate the identity of the users by either putting codes to be used by the users when accessing the system or giving an authorizing word or phrase when accessing the system. This process also allows the management to issue permission to access the system on a continuous basis and therefore ensure security and reduce risks. The auditing process is therefore effective in managing the risks and reducing chances of more frauds.
Financial accounting mostly rely on some of the following concepts; Assumptions, Principles and Modifying convections. Under the concept of assumptions, financial accounting relies on assumptions that are related with the stability of the amount of money that the company has, the period in which the company should exist in the market, individual assumption that the business should have and the on going-concern of the business that focuses on how the company is thriving (Clegg, and Sparrow, 2007). It also relies on its own principles that focus on the history of the cost of money that has been incurred and paid in the business, recognizing the revenue that is incurred in the business, its matching principle and the full disclosure of all the underlying principles of the business. Finally, financial accounting relies on modifying conventions that mainly deal with the essential practices that should take in the company, the amount of money that the company has and is willing to invest in, what the company or the business should conserve as part of business management and the cost benefit in the business.
The United nations Congress officially passed the Sarbanes-Oxley Act of 2002 (SOX), and there was a legislation designed to protect those who had interest in making their investments by reducing the errors and enhancing corporate disclosures reliability made pursuant to the securities laws, and for other reasons. In order to finish the task and make better the investment, the main aim of SOX has been to prevent and detect fraud in financial statements, policed by the Securities and Exchange of whether or not SOX, after functioning for a period, had effectively and had been actually been efficient in preventing and detecting fraud. The institutions that were affected by Sarbanes-Oxley Act of 2002 were most notably non-private businesses that were obliged to comply with the numerous needs of the law (Burke & Cooper, 2005). The shareholders and investors depend on the financial statements of the complying corporations were found to be positively affected by SOX, to the extent that it satisfied the users by fulfilling its purposes of preventing and detecting fraud in financial statements.
Various factors have contributed to the prior incidences of fraudulent financial reporting, including deficiencies in the audit process, lack of suitable corporate governance, and unethical management practices. For example, after the collapse of Enron in America, the country took upon itself to make a legislation to detect and thwart the kind of fraud that resulted to the downfall of Enron. A committee started the devising a bill to deal with the newsworthy matters that were brought about by filing of bankruptcy by Enron and the subsequent loss of pension suffered by its workforce. The situation would have been prevented suppose the existed a thorough and effective Sarbanes-oxley acts of 2002 in detecting fraud during the audit process. According to Armstrong 2006, the problem must have been caused by the insufficient oversight of accountants, the lack of auditor independence, weak corporate governance procedures, a stock analyst conflict of preferences, and even insufficient provisions of disclosure of which all revolve around the auditing. More specific, most authors, in reacting to the condition have pointed out that one of the major problems that must have led to the problem is the Sarbanes-oxley acts of 2002 in detecting fraud during the audit process (Armstrong, 2006).
The accounting and auditing professions have been shaken by the Enron collapse and the resulting ban from auditing public companies. There has therefore been a great need to alter the auditing process to enhance the accuracy of the obtained data of change the professional, which has yielded next-to-nothing results (Salaman & Storey, 2005). Congress has reacted to the events with the passage of SOX, aimed at preventing another Enron scandal. To make the stock offerings of the publicly traded corporation a more better investment, various companies that have undergone the same way do develop and use special purpose entities (SPEs) as liability receptacles aimed at removing millions of dollars of debt from the balance sheet. However, SPEs are only meant to operate as trust for the parent company or institution that initiated them.
SOX’s main functions have been to restore investing public’ confidence, accounting profession regulation, auditing and financial reporting process, and have acted as a directive to raise the standards of corporate accountability and transparency. Presently, many organizations and institutions, more so in US, are subject to SOX, most of which are big companies. SOX provision entails areas such limiting the services offered by human auditors, documentation and audit of internal controls, corporate governance, personal accountability, enhancing disclosure, protection for whistleblowers, analyst of interest conflicts, and professional conduct for the mangers. Mandan 2005 says that, “the most sweeping legislation offering accounting, disclosure and corporate governance in the generation has been SOX”. Regarding its importance to the auditors and other bodies, there is a great need to determine the effectiveness of SOX. The legislation, though having numerous merits, has been associated with demerits. In America, as noted by McGrath and Baird 2004, most of the companies are choosing to be private to do away with the SOX regulations. As from the new reporting needs of SOX, there has been a rise in the number of companies announcing privatization. SOX have been for only more than nine years. One assumption that has been made by those who employ SOX has been that it has bee effective in detecting and preventing the fraud in auditing.
Throughout their studies, subsidiary study questions including if or not the costs to comply with SOX are worth the result, and whether SOX is substantially different from former studies have not been explicitly discussed. Additionally, whether or not the Congress is qualified to give the remedy to the present fraud situation, and if SX will correspondingly lead to the return of investors confidence in the securities market by giving sufficient corporate transparency into the financial status of the target investment.
Research Methodology
The study will use statistical methodology in order to examine the collected data. The data will be randomly collected from a survey that will be conducted in organizations to evaluate the level of the effectiveness of the Sarbanes-Oxley act of 2002 in detecting fraud during the audit process. Among these factors that were subject of the assessment were the SOX outcomes referring to the period, personal attitude regarding SOX and the balance between the number of companies entering and those leaving SOX. The respondents will be classified into tow categories, as either of private companies and of public companies. A total of 30 private companies and 30 public companies will be randomly selected and their audit departments will be assessed on the basis of how effective the SOXs are (Dewe and Cooper, 2007).
Majority of the data that will be analyzed will start from the point where the fraud is detected. The mean number of occurrences of fraud before and after the inaction of SOX will be determined and tested using the unpaired t-test. The chi test will be employed to test the significant difference between the number of fraud occurrences before SOX and after. One advantage of the methods is that they are the most reliable in producing the most accurate data.
The other method that will be used is the involvement of the financial statements prior to the introduction of SOX and after its introduction and this will only apply to the public companies where SOX is used (Camilla, 2003). The methodology that will be used throughout the study will entail correlation research. Correlations will be examined between numerous statistics and the fraud occurrences in relation to the enactment of SOX.
Research Hypothesis
For clarification of the research direction, a research hypothesis will be of great significance. The hypothesis will be a statement that states or describes the expected outcomes of the research. It is also important for it to state the expected differences, relations between any two variables.
In order to investigate the question further and attempt answering it, the following hypotheses are formulated to aid in answering the question:
H0: SOX is not effective in detecting and preventing fraud in the audit process, that is μ1 – μ2 = 0. This will be the null hypothesis. It is the negative form of the research hypothesis.
H1: SOX is effective in detecting and preventing fraud in the audit process, that is μ1 – μ2 ≠ 0 will be the alternative hypothesis.
A very close examination will be provided as in some cases, two types of errors can arise. A type of error can take place when the null hypothesis is rejected when it is in fact true. The second type of error occurs when the null hypothesis is accepted when it is in fact incorrect. Type one of error might occur suppose the research reveals that SOX is effective, when it is not or when the results leads to conclusion that SOX is ineffective, when it effective (Caldwell, 2003).
In the analysis, some assumptions have been made to ease the investigation and curb complications. First, it is assumed that the samples come from a population with a standard normal distribution mean = μ. In addition, in the z-test, it is assumed that the variance for the samples is known with certainty as indicated in the tables below.
Rejection Regions
Suppose the claim does not give one particular direction it is non-directional and therefore a two- tailed test shall be used to carry out the test. At a significance level of 0.05 the z- value is 1.960 the rejection regions will be indicated by the graph as shown below in the shaded areas.
The p-value on each side of the tails becomes 0.05/2 which is 0.025. At this p- value the z- value is 1.960. our rejection region will be any value exceeding this value meaning that it will be falling within the shaded region and the corresponding p- value will be greater than 0.025.
Conclusion
In business management, accounting plays a very essential role since it gives information that is required for effective decision making in any business that wants to thrive well in competitive business environment. Financial accounting is the system that offers all the necessary information about a business through giving reports on how the business is doing and on how it relates with its investors, tax authorities and creditors.
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Brewster, C., & Vernon, G. (2007). Global Human Resource Management. 2nd Edition, London.
Chartered Institute of Personnel and Development.
Burke, J. & Cooper, L. (2005). Reinventing human resource management: challenges and new
Directions. New York. Routledge Publishers.
Caldwell, E. (2003). Research Designs and their applications: Connecticut, USA. Engage Learning.
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Political Campaign Analysis
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Political Campaign Analysis
Advertently, political science analyses of presidential campaigns do consider the role of political propaganda in presidential campaigns. Mostly, such propaganda get produced by one presidential candidate or their teams with the aim of discrediting other candidates and the most common forms appear as video commercials. Commonly, they highlight wrongs other candidates did, their weaknesses, wrong personalities, and other reasons why they are unfit to become presidents.
The first video film of such kind is one produced by President Barack Obama’s campaign team against Mitt Romney in 2012. It opens with a commentary from President Obama, introducing himself and establishing that he is to prove the various wrongs Mitt Romney has done to America. The accusations include shipping firm jobs to Mexico and China in business, outsourcing of jobs to India while in the position of Governor, securing tax havens, and storing large amounts of money in Swiss bank accounts.
On a bare ground, this video looks effective in its propagandist strategy. The first point to note is the fact that most of the claims are backed with considerably credible sources of information. Such include the Los Angeles Times, the Boston Globe, ABC News, and Vanity Fair. Ann addition to this is the fact that Romney’s speeches are also inserted in between each claim to the effect of the claim. However, it is worth noting that the authentications given for the sources may contain more information. Such is concealed. Furthermore, the commentaries from Mitt may not authenticate his relation to the claims. In some, he simply says “…America…” which may even mean nothing. This is the hallmark of propaganda.
Another video commercial of the same type is from the 2000 Bush VS. Gore campaign and is titled “Successful Leader (Bush 200). As opposed to the first, it seeks to give the candidate mentioned credit. With a mix of narrator and text appearances, the video says through a narrator and then shows in texts: How President Bush signed tax cuts, reduced government spending, improved schools, improved cases of lawsuits, and is compassionate.
Though very effective, no evidence other than flashing images of Bush in functions is presented. In a way, the commercial presents Bush as a good leader and an achiever who is the best for America. Although it does not discredit the opponent, it can sway voters in pursuit of the mentioned goods and successes.
Corporate Reporting and Analysis Barclays PLC
Part A
Corporate Reporting and Analysis: Barclays PLC
Barclays PLC’s Financial Performance 2020-2021
As a multinational financial service holding corporation, Barclays PLC is headquartered in London. In addition to consumer and consumer lending banking, the bank offers commercial and private equity to its clients. Barclays UK and Barclays Corporate & International are only a few of the many divisions inside the organization (Barclays PLC, 2020). Barclaycard UK’s consumer credit card business, as well as its UK personal, UK small corporate, and UK wealth divisions, are all part of the organization. For the purposes of this report, Barclays Corporate & International refers to all of Barclays’ UK and international organisational and capital businesses as well as its international Barclaycard operations (which include the company’s consumer operations in the rest of the world). More than 20 million people use its individual and card banking services, and one million people utilize its investment management, entrepreneurial, and commercial lending services (Barclays PLC, 2021). The analysis focuses on the 2020-2021 period.
Barclays PLC has announced a full-year profit of £1.53 billion for 2020, which is a 38 percent drop from the previous year, but it still above analysts’ projections (Barclays PLC. 2021). A net profit of £220 million attributable to shareholders was reported by British lender in the fourth quarter, despite the United Kingdom imposing extra lockdown measures in response to the reappearance of Covid-19 (Mugaloglu et al., 2021). Despite the pandemic’s dismal economic forecast, the business and investment bank’s full-year revenue climbed 22% to £12.5 billion, despite a large rise in impairment losses as a consequence (Barclays PLC, 2021). After another good performance by its investment bank and a steady decline of the coronavirus’s effect on the business’s consumer divisions, Barclays’ third-quarter earnings more than quadrupled, posting that its third-quarter net income above analysts’ estimates by £1.45 billion (Barclays PLC, 2021). This was an increase from the previous year’s net income of £611 million (Barclays PLC, 2020. Revenue increased by 5% to £5,47 Billion, compared to the predicted number of £5.2 billion (Barclays PLC, 2021). New loan loss provisions plummeted from £608 million last year to only £120 million this year, but the investment bank once again outperformed, aided by a trade negotiation boom that boosted its performance (Barclays PLC, 2022). Equity trading increased by 10%, while fixed-income trading fell by 20% when market volatility returned to normal in the middle of 2020 (Chouaibi, Chouaibi, and Rossi, 2021). According to the most recent statistics, the British economy has witnessed a considerable resurgence in consumer spending. Since 1948, Barclays has boosted its GDP growth prediction for the United Kingdom to 7% for this year. In addition, it suggested that future interest rate increases may occur sooner than originally expected (Ahmed, Bangassa, and Akbar, 2020). Profits from retail banking in the United Kingdom increased from £196 million to £451 million (AlAli, 2020), as a result of decreased impairment charges and increased revenues from recovering consumer activity.
In great part, the success of Barclays PLC may be ascribed to the company’s overall strategic approach to business, which includes connections, collaborations, and technical innovation, among other things. Furthermore, despite the fact that consumer financial services are continuing to be transformed by technology, Barclays has continued to innovate and deliver additional goods and services to its customers, leveraging payments interconnection and increasing overall operational efficiency as a result. According to a study by Lu and Boateng (2018), the capital markets have evolved, and Barclays has had to strive to maintain its market position as a major global investment bank while simultaneously investing in new capabilities for its clients. Whenever it comes to working with customers and clients as they make the transition to a low-carbon economy, Barclays is dedicated to using its consulting and financial expertise to help them navigate this period of remarkable upheaval (Barclays PLC, 2021). Additionally, Barclays has placed a high priority on the development of digital capabilities in order to improve customer service while also creating additional income streams. In order to accomplish these objectives, it was vital to expedite digital adoption and access while also ensuring that no consumers were left behind in the process. Barclays gained a significant competitive edge in the banking industry by establishing a more cost-effective infrastructure and using data quality and volume to better understand customer expectations, foresee trends, and deliver more competitive products and services. In the wake of the COVID-19 pandemic, for example, Barclays quickly made new products intended at helping consumers and generating revenue for uncertain times. In its 2022 report, Barclays PLC reports that businesses and individuals were provided with lower interest “COVID loans” as a way to boost its image and to meet the needs of its clientele.
As a consequence of COVID-19, the world’s financial markets have experienced substantial volatility and instability, leading to a period of severe turbulence and destabilization. It is thought that the virus’s knock-on effects will continue to be severe, despite the fact that the full extent of the virus’s influence is now unclear (Barclays PLC, 2021). Following the outbreak of the COVID-19 virus, the whole economy was thrown into turmoil, culminating in the worst recession the world has experienced in more than a decade (NatWest Group, 2022). In contrast, even if global growth is anticipated to increase, it is likely to be unevenly distributed across countries, with strong growth in wealthier economies being contrasted by poor development in many emerging economies (Mugaloglu et al., 2021). As a consequence of government-led attempts to manage the epidemic and uncertainty about the disease’s long-term survival, the economies and economic institutions of impoverished countries continue to struggle, making recovery more varied, difficult, and unpredictable in nature for Barclays’ overall profitability. Performance in key financial services is being lost in mature countries as a consequence of low interest rate conditions combined with the significant impact of COVID-19 rules (HSBC UK Bank plc, 2022). Because of this, financial institutions have become more dependent on commission-based income from businesses such as payments and technology. According to reports by Mukumbi, Eugine, and Jinghong (2020), one of the most immediate impacts of the global health disaster on the real economy is an increase in the credit risk of banks’ corporate and individual clients. The same is highlighted through Barclays’ financial report for 2020-2021 period. The financial services industry must distinguish between occurrences that are mostly ephemeral and will be quickly absorbed and those that will need the implementation of management and reclassification processes in order to continue sustaining the economic growth and contribute to its recovery.
Even though COVID-19 has the potential to trigger a major catastrophe, the impact it will have on the financial system and the interaction between financial institutions and their clients will almost certainly be beneficial, particularly in terms of the sector’s digitization and ability to provide excellent customer service to its customers. It is becoming more difficult for even the most regionally and divisionally oriented banks in the United Kingdom not to advocate the usage of channels that were never meant to be a primary purpose. A particularly challenging phase is now being navigated by financial institutions, during which they must show actual connection to their clientele. Following COVID-19, financial institutions are likely to be more aware than ever before of their service gap, which has become more apparent than ever as a result of the regulations. This may prompt financial institutions to accelerate their digital transformation journey through partnerships and engagement with the fintech industry. During the 2020-2021 period, the technical innovation of Barclays PLC was vital to the bank’s continued existence. Modern technology has permitted the development of technologically enabling solutions such as robots and artificial intelligence (such as sophisticated BOTs that aid in the adoption processes of technologies presented on the channels direct), as well as the ability to move about more freely. When applied to critical jobs, technology enabled more straightforward security while requiring less interaction with workers and consumers than had previously been achievable.
Evaluation of the Use of Performance Measurement
The term “financial performance” refers to an objective assessment of a company’s ability to manage its assets and generate income via the execution of its primary business strategy. As a side note, the word is often used to characterize a company’s overall financial health throughout the course of its whole commercial life cycle. When studying companies within the same industry or when reviewing whole sectors or segments, analysts and investors look at financial performance in order to make judgments about which companies to invest in (Ahmed, Bangassa, and Akbar, 2020). Lines of credit, investors, stockholders, employees, and corporate leadership are all examples of parties that have a vested interest in the operation of a firm. In order for a corporation to be financially successful as a whole, the financial performance of each of its divisions is critical. When it comes to financial performance, a company’s capacity to generate money while simultaneously managing its assets, responsibilities, and corporate interests of shareholders and stakeholders is the most important factor to consider. Every one of the several approaches for assessing financial success should be utilized in conjunction with one another, but they should also all be used in collaboration with one another as well. Furthermore, line items such as operational income, operating cash flow, and operating profit might be included in conjunction with total unit sales in order to present a fuller view of the company’s financial performance (Camilleri, 2018). If an analyst or investor wants to uncover proof of high profit margins or a decrease in total debt, it may be essential for them to look further into the financial data.
Barclays PLC uses liquidity, turnover, cash reserve, and its profit margins as the basic financial performance indicators. To determine this, the company reports on the said indicators in its balance sheets, income statements, and cash flow statements as the main tools to measure performance. Balance sheets are financial statements that describe the financial situation of a firm at a certain moment in its history. It provides a high-level representation of the organization’s asset and liability management. The difference between long-term and short-term debt is disclosed on the balance sheet of a company. Aside from that, they may be able to get information on the company’s asset mix as well as the percentage of assets backed by liabilities to shareholder equity. The revenue statement is a summary of all of the company’s activities for the year. In accordance with the accounting method in use, the income statement begins with revenue or sales and ends with profit or net income. The gross profit margin, cost of goods sold, operational profit margin, and net profit margin are all included in the income statement, which is also referred to as the profit and loss statement (Omran et al., 2021). Additionally, the report contains information on the number of shares presently in circulation, as well as a comparison of the company’s performance with that of the previous year. Profit and loss statements, as well as the balance sheet, are combined into a cash flow statement. According to some financial experts, the cash flow statement is the most important financial statement since it reconciles net income with cash flow (and vice versa) (or vice versa). Dividends, capital expenditures, stock repurchases, and stock dividends paid by the company are all included in this area of the financial statement. In addition, it offers information on the sources and uses of cash generated via operations, investment, and borrowing, among other things.
The banking and financial services sector uses non-financial performance measures as an extra indicator to analyze the activities that a firm feel is vital to attaining its strategic objectives. A few examples of non-financial performance indicators often used by corporations include customer connections, people, operations, quality, cycle time, and the firm’s supply chain or pipeline of commodities, among others. In order to show that all indices of organizational success are ultimately related to the financial side, which is the company’s major emphasis, Barclays PLC intends to use non-financial statistics to illustrate this. Consumer and business trends around interactions with one’s social and environmental settings are changing (Maama and Mkhize, 2020), and this is causing difficulties for Barclays in the development of performance metrics. Effective performance assessment tools are crucial in the development of strategy, the evaluation of organizational objectives, and the compensation of managers. There is increasing demand on financial services businesses in the United Kingdom as well as elsewhere in Europe to incorporate more non-financial indicators in their financial statements and reports. According to client feedback, traditional financial institutions are no longer in operation or are failing. Recent research by Ahmed, Bangassa and Akbar (2020) into financial services businesses in the United Kingdom revealed that the vast majority of stakeholders were dissatisfied with the present evaluation methods in place. Profitability and accounting returns are the primary focus at the moment, with less attention placed on value drivers like as customer and employee satisfaction, innovation, and product quality. In order to improve its performance management systems, Barclays PLC is now in the process of implementing new systems.
The business activities of Barclays PLC are clearly demonstrating that the corporation is shifting away from focusing only on financial success indicators as the primary criterion for decision-making. This change was influenced by a number of different circumstances. Stakeholders have expressed concern about the way in which information is presented to different groups of Barclays stakeholders, accounting process distortions, and a growing disparity between a company’s market and book values, which ultimately results in changes in the company’s corporate valuation. Also noteworthy is the fact that financial reports do not always make it feasible to identify whether the results are beneficial to the company’s operations (Narkunienė and Ulbinaitė, 2018). In other cases, financial data may improve for a variety of causes that are unrelated to the organization’s activity External conditions including new business laws, government subsidies amid the COVID-19 pandemic, shifts of the bargaining powers of different stakeholder groups and changes in the general environment are causing Barclays PLC to reconsider financial reporting. For example, the issue of corporate social responsibility, sustainable business models, and environmental consciousness feature heavily in Barclays’ annual performance since 2018. The same trend is seen in the entire banking and financial services industry with other players such as Lloyds Banking Group and NatWest Group incorporating newer non-financial performance measures in their annual reports. New accounting procedures, in addition to other considerations, may have an influence on financial statistics in the future. Further, financial indicators show historical company activity that may be compared across other firms, which can be deceptive when interpreted in the wrong way. Barclays understands this issue is greater than most firms want to admit. Financial indicators, on the other hand, may be used to evaluate which firms have done better in the past; but what investors really want to know about a company’s long-term prospects and returns is what it plans to accomplish in the future, with other stakeholders such as consumers, the government, the media, and activist community pushing for better social, political, environmental, and sustainability reporting.
Barclays PLC, NatWest Group, and HSBC UK Bank performed well in 2018, 2019, and in the first quarter of 2020. Overall, their performances followed a similar curve (HSBC UK Bank plc, 2022; NatWest Group, 2022, Barclays PLC, 2020). The economy of the United Kingdom, as well as the economy of the rest of the globe, has continued to recover from the effects of the epidemic in recent years. Concerns about public health dangers and the economy’s long-term prospects, on the other hand, continue to be widespread. Supply and inflationary pressures in the short term, as well as the possibility that Covid will have a greater effect on activities, are just a few instances of what might happen. In 2020, financial services would provide £164.8 billion to the UK economy, accounting for 8.6 percent of the country’s total gross domestic product (GDP) (Khan et al., 2020). The industry’s headquarters were in London, which, at the time of writing, was responsible for more than half of the sector’s total production. When it comes to its contribution to national economic output, the financial services business in the United Kingdom was placed third in the Organization for Economic Cooperation and Development in 2020 (Dias et al., 2020), with contributions from Barclays PLC, NatWest Group, and HSBC UK Bank. As a result of this era’s lack of extraordinary losses, significant capital calls, or any major mergers and acquisitions, banks had their first period of stability since the last economic downturn (AlAli, 2020). Indeed, bank earnings outperformed the expectations of the vast majority of industry observers. When measured in percentage points, the return on equity (ROE) in 2020 came in at 6.7 percent, which was lower than the cost of equity, but higher than the 4.9 percent recorded during the financial crisis in 2008 (Ngwakwe, 2021). It was also higher than projections.
Part B
“Budgeted performance is a better criterion than past performance for judging managers”
For the reason that inefficiencies in prior outcomes may be recognized and addressed in planning, budgeted performances can be regarded as stronger measures in an effort to rate the performance of a managers in an organization. Since the budget has no concealed redundancies and can also be based on actual instead of previous economic circumstances (Ho, 2018), budgeted performance is preferable to past performance as a foundation for measuring current performance for managers and the overall performance of an organization (Zor, Linder, & Endenich, 2019). Future circumstances will most certainly vary from previous positions, an element that is well articulated and considered in a budgeting approach. When it comes down to it, a budget is nothing more than a prediction created in advance for the period of time to which it applies. Because of rigorous preparation and thinking, everything has come to fruition. Budgets may be thought of in a variety of ways, but they always center on a set of goals that must be completed during the course of the fiscal year. The only people who have the authority to approve a company’s budget are the company’s senior management. Planning, coordination, and control are all made simpler as a result of these improvements. Human resource management techniques such as this one are quite successful. It is beneficial in keeping track of and evaluating the performance of each department when it is used. Actual results are compared to desired constraints or objectives in order to keep expenditures under control and to decrease them as much as possible.
The budgeting process involves concerns for future profitability in order to secure a reasonable return on resources invested, which is a basic business aim. Pratolo, Sofyani, and Anwar (2020) argue that every company’s plan for coping with the uncertainty of tomorrow should have been established. By failing to plan, a corporation is left scrambling for answers when things go awry. On the other hand, the great majority of businesses plan ahead of time for how they would respond in the event of an accident. Operating plans for the next several months are spelled out in a budget, which also serves to measure the company’s action plan. All levels of management need to be involved in strategic planning and projecting results; it may even act as a motivator for staff to work hard to attain their goals. Businesses may utilize budget-to-actual comparisons to evaluate the effectiveness of certain management teams.
Consistent operational circumstances, on the other hand, make it feasible to place a greater reliance on previous budgetary accomplishments. A company’s budget, on the other hand, takes into consideration more than only the company’s historical performance. Long-term aims and operations are also taken into account while developing a budget for the organization. Therefore, budgeted performance is substantially more essential than prior performance when reviewing actual outcomes as a foundation for decision-making (Belardinelli et al., 2018). In order for management to plan ahead and take necessary decisions, all of these considerations, as well as the competitive structure of the sector and the effects of current or potential government legislation, should be integrated into a budget. It is critical for managers to keep an eye out for adjustments in expectations during the budgeting process and to include these shifts into their performance assessments based on actual outcomes as soon as they are identified.
In summary, a performance report is primarily and often used by the management of a firm as both a follow-up technique to evaluate the actual outcome to the budgeted objectives and outcomes and to gauge the overall fairing of the team. The implementation of performance budgeting can be connected to a wider scope of attempts to enhance spending oversight, and the productivity and effectiveness of key internal stakeholders within an organization. As a consequence, performance budgeting could be merged with greater adaptability for management teams in exchange for increased involvement and transparency for results, allowing them to choose the best way to deliver services.
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Appendices
Appendix 1: Barclays PLC Income Statement 2018-2021
Appendix 2: Consolidated Summary Income Statement and Balance Sheet 2018-2020
Appendix 3: Consolidated Cash Flow Statement
Appendix 4: Income Statement Information 2020-2021