IMPACT OF MORE ACCOUNTING INFORMATION - Essay Example

IMPACT OF MORE ACCOUNTING INFORMATION Introduction This analysis deals with the impact of more accounting information under different situations. The analysis begins with an explanation of the process of accounting highlighting in particular, the representational nature of accounting showing the differences in users of financial statements. The impact of more accounting information will be discussed in relation to the users of the financial statements such as the shareholders, suppliers, customers and creditors. Likewise, the impact of more accounting information when used by the competitors (Molloy and Molloy, 1996) or employees will also be discussed. Considerations of future situations tend to affect conventional accounting, although using elements of the future forms an essential component of the accounting structure. The financial standard of decision relevancy of accounting (Weston and Brigham, 1993), generally agreed to be a primary factor that gives societal value to accounting, may be weakened by the search for a more trustworthy accounting procedure. One of the best techniques in accounting would be to incorporate aspects of future values without leaving too many degrees of freedom for manipulating the data. The aim is thus to keep accounting credible, and yet predictable and even if more accounting information becomes available, all aspects of the information will have to be considered, before any final conclusion is drawn on the advantages or disadvantages of the accounting information. Defining Accounting Accounting is defined as the language of business (Lehman and Dufrene, 1998). It is considered as the language of business as it helps to connect users at a professional level and all users of corporate financial statements can easily read the statements and understand the operational and financial aspects of any company and in this manner, the representational nature of account seems to be at the core of inter-professional or business communication. Accounting information, first and foremost 'represents' company structure, functions and modes of operations apart from giving important information on standards, finances and future possibilities of the company. The financial statements of any company are composed of balance sheet, income statement, and statement of cash flows. The financial statements are audited by external auditors (Whittington and Pany, 1995) either chartered accountants or certified public accountants in order to give credibility to the statements. All companies are required to give financial statements to its shareholders, suppliers, creditors, employees, managers, board of directors, government regulating bodies and the like in order to ensure that the company does not violate any corporate laws and that they remain accountable to their stakeholders and financiers. The financial statements are important tools for decision making and determine company management policies and thus accounting forms the basis of any corporate management decision making. There have been arguments on incorporating additional estimates or forecasts of the future into financial statements and providing estimates of future cash flows. This may in turn be considered alongside some sensational corporate scandals, for companies located in the US, which have been focused on reducing the power of managers which could engage in fraudulent behavior and accounting manipulation of assets, liabilities and capital. A more reliable and validated or trustworthy figures on the balance sheet is expected and income statement accounts have been implemented by new and more complicated monitoring and inspection processes. As to how far this can be achieved can be studied by using market values in accounting reports. The Generally Accepted Accounting Principles (GAAPs) in a number of countries contain elements of the market values of assets and liabilities. To illustrate, International Accounting Standards (IAS), U.K., and U.S. GAAPs require financial investments that are not long-term investments, to be shown at their market values, with unrealized gains/losses. Considering aspects of future accounting, there may be a compulsory need to include the use of 'Market Prices' and "Fair Values" in Financial Reports in order to produce greater impact of accounting information. Hopwood et al (2004) stated that "accounting has never been a purely national phenomenon," and he also pointed out that "both its techniques and the significances that are in part created by them have a history of penetrating national boundaries, moving along the pathways established by commerce and patterns of political influence" (p.32). International accounting services have grown in leaps and bounds to keep up with the various needs of international business companies and even, in some instances, to comply with the immediate needs of the global economy. However, whether accounting services have influenced the direction of its many sectors in the territorial and economic arena, remain to be studied. From the bird's eye view of the business organizations themselves, recent practice suggests that more interest needs to be shown on the international aspects of such practice and, this in turn has increased interests in standardization and harmonization ( Hopwood, et al 2004). Watkins (1998) stated that the financial services and business services sectors when combined belong to the top which includes the almost all successful sectors in the United Kingdom. This is especially so, when the economy is judged on the basis of employment creation and profitability. Watkins also shows that since 1980, the number of vacant jobs in the sector has grown from 1.6 million to 2.8 million. Also, one contribution the real output has doubled from 11 to 20 per cent of current-price GDP, and gross profits to almost 90 billion (CSO, 1995, cited in Watkins, 1998). This business expansion was caused by many factors, including growing consumer wealth, deregulation and demographic changes, as well as the trend (Triola, 1995) in advanced economies towards services. Financial services output, as measured by percentage of GDP, were predicted to overtake manufacturing some time in 1996 (McRae, 1995). The financial accounting services sector is composed of three interlinked and interdependent sub sectors. These are retail, corporate, and banking sectors. Accounting services include banks, insurance companies, mortgage lenders, securities houses, unit and investment trusts, building societies, and many non-banking organizations that are engaged in financial activity. The business services sector also encompasses many areas and a wide range of professional firms such as solicitors, accountants and computer specialists, management consultants. Although both these sectors are usually considered as separate, they are interlinked in their functions. Belkaoui stated that income smoothing hypothesis can be seen as the intentional normalizing of income amounts for the organization to reach the company goals or objectives as forecasted before the start of each year (Belkaoui, 1991). Hepworth's research showed that observed "some of the accounting techniques may be applied to affect the assignment of net income to successive accounting periods . . . for smoothing or leveling the amplitude of periodic net income fluctuations." (cited in Belkauoi, 1991). It was also stated that corporate managers may be motivated to smooth their own income (or security), with the assumption that stability in income and rate of growth will be referred over higher average-income streams with greater variability. Bhimani stated that many commentaries on major economic cycles in human civilization have mentioned that there are three major ages of economic evolution namely a) the agrarian age, b) the industrial age, and c) the information age (Bhimani, 2003). These age ranges are affected by the two major factors of dominant factors of power and production, and their implications can even reach the wider business disciplines. The ages overlap in some instances and so cannot be exactly positioned on a time scale. Differences also exist between different countries' paces of development (Bhimani, 2003). The agrarian age had continued roughly until the second half of the eighteenth century in the Western world, and was followed by the industrial age. The industrial age can also be mixed with the information age over several decades, so that we presently find ourselves in a transitional stage between the industrial and the information age. This is reflected in the way in which our thinking about management and accounting has been changing taking in and adapting to the attributes of both industrial and information age. The present information period is described by the emergence of new organizational types that have torn down territorial walls such as go beyond industry boundaries, national borders, and markets, and that seem to defy central control. There is a 'third wave' economy that is dominated by service organizations including those in the trade sector and the financial or business sector (Hope and Hope 1997). Here information is the key competitive factor for the success of the company and information includes financial statements and income statements. Gallhofer and Haslam (2003) stated that accounting and emancipation could be linked together. This idea is controversial and the exact dynamics between accounting and emancipation may have to be researched further. A very popular perception of accounting almost reduces it to a 'taken for granted', somewhat unexciting and unappealing mechanical practice that records and reports the 'facts' of the business organization that are simply to be recorded and reported, and it is considered as a purely technical practice. Accounting is apparently taken in this view to be virtually not social and without political practice. This perception by many people of what accounting should be is in part shaped and fostered by the portrayal of accounting and the accountant in literature, film and the media and seems to us to be of some weight at least in the public realm. This view is truly consistent with a perception of accounting that also appears to be in effect quite widely held, namely that accounting is not something that needs especially to be probed into by anyone outside of the apparently separable sphere of the accounting expert. Scarborough (1998) emphasized that values drive beliefs, attitudes, and actions, and that values are in large part culturally derived, and therefore a manager, a negotiator, or a tourist who understands others' cultural background would be better able to understand why people act, think, and speak the way they do, and would be better able to predict how people will react to certain words and actions. In trying to establish a link between culture and values and how this can affect the way accounting information are either provided or taken by individuals and companies, culture could be simply defined as set of values, attitudes, and beliefs shared by such a group, which sets the standards of behavior required for continued acceptance and successful participation in that group. The newly hired accounting personnel learn much of the company culture from more experienced employees (Fossum, 1999, p45-56), superiors, and mentors. They tend to look for role models, people who seem to know how to get along in the group, and imitate them. In effect then, members of a culture share common experiences and a heritage that establish and reinforce common values, attitudes, and beliefs. These characteristics define the behaviors members should expect from one another. They not only establish the group's common identity and continuity over time but set it apart from other cultures. Organisational culture thus relates directly to how information is distributed and shared within a company and its employees or management. Financial statements could in this way have a representational value as it tends to provide information on organizational culture. The users of financial statements could be the people in the management, analysts, creditors, employees or shareholders. The shareholder will use the financial statements to determine whether to invest (Ross, 1996) more money into the business organization. This will be favored if the income statement shows that the company has been able to generate a net income for the past year or years in operation. Based on the financial statements, the shareholder will also notice the trend of the company. The income statement shows that, based on the profits or loss generated for the past year or years in operation, the company has a higher probability of generating profits in the next few years or generating a loss for the next few years in operation. If the company generates a loss for the past year or years, then the shareholder will probably withdraw his or her money from this losing company and then invest the money withdrawn from the losing company in another company that has been generating profits for the past year or years in operation. Stakeholders including shareholders play a major role in company performance as they are the ones who invest and help the company to grow further. The profits generated determine company performance and future and shareholders have a major contribution in increasing profits. The suppliers also use the financial statements to determine whether they would continue to produce the raw materials or finished goods that the company needs. If the company is shown to have a loss for the past year or years in operation, then there is a high probability that suppliers would look for other competing companies to sell their materials or finished goods. The financial statements are also used by the creditors. The creditors use the financial statements to determine whether they would increase the credit limit of the debtors. The creditors approve long term credit application of a company in most cases only if the company has been generating sales and profits (Still, 1988) for the past years in operation. If the company has been generating losses over the past years in operation, then the banks generally do not approve the loan unless the company provides collateral for the loan amount. The financial statements are also used by the customers who use the financial statements to determine if the company has been generating profits over the past years in operation. If the customers are satisfied that the company has been generating profits for the last years in operation, then they continue to remain loyal to the company. But, if the company has been generating losses for the past years in operation, then the customers may look for other competitors to replace the losing company because there are possibilities that the customers' favorite suppliers may close down and file for bankruptcy. The financial statements are also used primarily for decision making within the company. Financials statements determine whether additional factory equipment would be purchased in order to increase production. This is possible only if there is a strong demand for products. If based on the financial statements, the managers see that their products are not so in demand as compared to their competitors, then the management could innovate or renovate their products in order to increase its share in the customer market. The employees use the financial statements to determine if they would continue to stay with the company. If the financial statements show that the company has been generating a huge net income for the past year or years and that the historical net income trend shows that the company will continue to generate income for the next few years in the future, then the employees would continue to stay and increase their loyalty to the company. The impact of more accounting information is that the users of the financial statements (Larson, 1995) will have enough data to decide whether to invest their money in the company or withdraw their money from the business. This is the decision making strategy of the shareholders. More accounting information will give the creditors a better look at how the company is performing in terms of generating profits. More accounting information is needed to generate a trend analysis. This means that if the company has been generating a loss for the past three years, then the company may in all probability generate a loss for the next few years but if a company has been showing profits, the trend may continue over the next few years and more accounting information can only give a clearer and more comprehensive picture of the financial status of a company. On the contrary, the impact of more accounting information is that confidential business transactions in terms of expenses and costs generated and revenues or sales received may not be good for the company. Despite needs for accountability, some companies would prefer to keep its financial statements confidential and may not be keen on divulging information to all customers and investors alike. Yet, transparency and accountability are key features of corporate ethics and management and is also an essential component of accounting showing the true representational nature of accounting procedures. Competing companies can study financial statements and use the financial data to manipulate their own strategies and increase their market share. CONCLUSION In this discussion, the main approach to the problem remains on accounting as the 'language of business'. Accounting seems to connect professionals from all spheres and creditors and investors along with customers and shareholders and employees learn about business from accounting data and standards. The many users of the financial statements rang from suppliers to creditors, government regulating agencies, customers, managers, board of directors and to prospective investors. The impact of more accounting information has been specifically emphasized here and the argument is that the users of the financial statements will have more data to ponder on in their decision to invest more money in the business or withdraw money from the business. In fact, financial statements and accounting standards tend to increase accountability and transpreancy of a company and cam make or break the reputation of a company, firmly establishing its business or giving an upper hand to its competitors. Yet, more accounting information and comprehensive financial data displayed to the public could do harm to a company, if it lacks honesty in its operations and there may be issues of losing confidentiality of business transactions. The competitors can also use the financial statements to take away a part of the company's market share. The employees may also use the financial statements to ask for an increase in salary or there may be trade union repercussions. Since the financial statement are used for decision making, there is indeed a clear impact if more accounting information is divulge to the shareholders, customers , employees or the competitors. REFERENCES: Belkaoui Ahmed, Monti-Belkaoui Janice. (1991) Accounting in the Dual Economy. Quorum Books. New York. p. 45. Bhimani Alnoor (2003) Management Accounting in the Digital Economy. Oxford University Press. Oxford. p. 112. Brigham, E., Gapenski, L., (1985) Financial Management, Dryden Press, London Campbell, A., Luchs, K., (1998) Strategic Synergy, Thompson Press, London Etzel et al. (2001) Marketing, McGraw-Hill, & London Fossum, J., (1999) Labor Relations, Irwin McGraw-Hill, London Gallhofer Sonja, Haslam Jim. (2003) Accounting and Emancipation: Some Critical Interventions. Routledge. New York p: 1. Garner, D., McKee, D., (1992.) Accounting Services, the International Economy and Third World Development Praeger Publishers, London, p. 72. Hope Jeremy, Hope Tony (1997) Competing in the Third Wave by The Ten Key Management Issues in the Information Age Harvard Business School Press Hopwood et al. (2004) The Economics and Politics of Accounting: International Perspectives on Research Trends, Policy, and Practice, Oxford University Press, Oxford, p. 32. Horngren, C. (1977) Cost Accounting A Managerial Emphasis, Prentice Hall, London Hughes et al., (1998) Transform Your Supply Chain, Thompson Press, London Irwin, D., (2000) On Target, Achieving Best Business Performance, Thompson Press, London Larson K., Miller P., (1995) Financial Accounting, Irwin Press, London Lehman C., Dufrene D. (1998) Business Communication, South Western College Publishing, London Molloy M., Molloy M., (1996) The Buck Starts Here Profit Based Sales and Marketing Made Easy, Thompson, UK Reilly, F., (1986) Investments, Dryden Press, London Ross et al. (1996) Essentials of Corporate Finance, Irwin Press, London Scarborough Jack (1998) The Origins of Cultural Differences and Their Impact on Management. Quorum Books. Westport, CT. p. 1. Slavin S., (1989) Economics, Irwin, London Still et al. (1988) Sales Management, Prentice Hall, London Sussland, W. (2000) Connected, A Global Approach to Managing Uncertainty, Thompson, UK Triola M., (1995) Elementary Statistics, Addison-Wesley Publishing, England Watkins Jeff (1998) Information Technology, Organisations, and People: Transformations in the UK Retail Financial Services Sector. Routledge. London. p.29. Weston, J., Brigham, E. (1993) Essentials of Managerial Finance, Dryden Press, London Whittington R., Pany K., (1995) Principles of Auditing, Irwin, London Read More