Accounting and Society - Research Paper Example

? Accounting and Society al Affiliation The field of accounting initiated in the thirteenth and fourteenth century in Italy. Where, first, the concept of double entry was used. Financial and management accounting are two types of accounting. The former serves more externally than internally. And the latter serves internally. Different accounting bodies came into existence in order to have globally uniform accounting standards. They can be used globally in a uniform application. In the year of 1970, Accounting Standards Steering Committee came into existence. And in the year of 2001, the International Accounting Standards Board replaced the IASC. Many of the countries have adopted the International Financial Reporting Standards (IFRS) till this point of time except for the United States of America. Now, it has decided to adopt the IFRS by the end of 2015. Accounting and Society Introduction Companies considerably depend on the use of accounting. Accounting serves the role of universal business language (Hussain, 2005). Without the use of accounting, it would be nearly impossible for companies to run their business affairs and continue doing business. It is this help of accounting and its relevant and applicable standards that have ensured the continued existence of companies in the most appropriate and applicable commercial terms throughout the different industries and businesses. Each business has its own industry and it has its own operational style. And, in each industry, various and numerous products and their diversified versions are available for the purpose of sale or for the purpose of subsequent processing. With the passage of time, and due to the boom and increase of diversity in the business world, it becomes more relevant and practical to introduce and implement new accounting theories and accounting standards for the purpose of harmonizing the business structure in the most appropriate and relevant structure. Thanks to this sort of thinking and approach, today, we have different specializations in the field of accounting than ever before. On the one hand, financial accounting serves the purposes and objectives of the external shareholders and stakeholders; on the other hand, management accounting helps internally; providing the best possible combination of accounting information that can be used for the purpose of making most appropriate and relevant budget, cost, and management-related decisions. Financial accounting users prefer to see the aggregate performance of a company; for instance, they prefer to see whether the company has performed well in comparison with the financial statements of the previous year. And to what extent, the company has been successful in ensuring the achievement of its financial corporate goals and objectives. On the basis of comparative analysis, the shareholders decide and take their financial decisions. The users of financial information can be creditors, suppliers, shareholders, regulatory and government bodies and so on. It is the role of regulatory bodies like, International Accounting Standards Board, and other government bodies to ensure that whether a particular company has applied and complied with all the basic and fundamental regulations and standards. This compliance is necessary for companies and society as well. The compliance of standards ensures that the company understands the needs of all the relevant stakeholders and shareholders. Compliance of relevant accounting standards and legal requirements ensures shareholders that their financial investment is not at stake; rather, it is being used according to the relevant and applicable standards. In order to ensure that a company has fully or partially applied standards while preparing its annual or bi-annual financial statements, the public limited companies are required to publish their annual financial and non-financial information for the purpose of informing the general public. This explains the concept of free market, where the accounting and relevant information must be freely and readily available to all types of users of the financial statements. In these financial statements, the accounting standards called as, the International Financial Reporting Standards (IFRS) are used. In the beginning, America was not ready to adopt the IFRS. Soon after the dramatic collapse of Enron and other giant companies, the United States of America changed its approach towards the adoption of IFRS. Consequently, it has now decided to adopt the IFRS by the end of 2015 in order to strength the global hunt for the uniform application of the accounting standards. In the subsequent parts of this piece of writing, history of accounting and its fundamental types are discussed; then, regulators of accounting standards are explained. Then, international financial reporting standards are evaluated. A critical examination is provided about the adoption of global accounting standards by America by the end of 2015. Last, but not least, a conclusion sums up the entire research paper by highlighting the most appropriate points. History of accounting Accounting is not a new field. The history of accounting can be traced back to thirteenth and fourteenth century in some parts of Northern Italy. At that time, the concept of double entry was first used by most of the business people. And it was the work of the Franciscan monk who first documented double-entry accounting practice in the year of 1494 (Deegan, 2009). After practically understanding and evaluating the commercial significance of the concept of accounting, in the year of 1854, Society of Accountants (Edinburgh) came into existence as a body of accountants representing the field of accounting. Then, in 1880, 1887, 1910, 1928, Institute of Chartered Accountants in England and Wales (ICAEW); American Association of Public Accountants; The Australian Society of Accountants (Society); and The Institute of Chartered Accountants in Australia came into existence respectively. The mere existence of these different accounting bodies did not fulfill the requirement of a regulatory body. In the twentieth century, a need to regulate and direct the accounting practices was felt. In order to regulate the entire field of accounting, a process of codification of different accounting standards and different accounting practices was launched. In the beginning, the major focus was given on the collection of fundamental accounting standards. In the United States of America, Securities Exchange Act came into existence and this Act required disclosures of financial information in the year of 1934. This regulatory body, Security Exchange Commission, was assigned the role of regulator in this field. In the year of 1939, Committee on Accounting Procedure initiated to issue statements on accounting principles. In the year of 1970, Accounting Standards Steering Committee came into existence with the aim of developing and issuing different accounting standards. Soon after, in the year of 1973, Financial Accounting Standards Board was established in the United States of America. But, prior to the establishment of Accounting Standards Steering Committee in UK, in the year of 1946, based on the documents of the ICAEW, Institute of Chartered Accountants in Australia (ICAA) issued five Recommendations on the Principles of Accounting. The Institute of Chartered Accountants of England and Wales, the Canadian Institute of Chartered Accountants and the American Institute of Certified Public Accountants discussed and decided to form an international accounting standards group. Finally, in the year of 1967, they agreed and formally established an Accountants’ International Study Group. This Group further facilitated the process of internationalization of accounting standards. In the year of 1973, this Group finally decided to transform into the International Accounting Standards Committee (IASC) (Wood & Sangster, 2008). In the accounting calendar, this is considered to be a landmark event that subsequently changed and transformed the entire accounting standards and accounting practices into new era. In the year of 2001, the International Accounting Standards Board (IASB) replaced the International Accounting Standards Committee (IASC). In this entire accounting history, the role of Australian accountants was different; in the middle of 1990s, the Australian accountants preferred to harmonize their standards with the accounting standards of the IASC. But later, the Australian Financial Reporting Council (FRC) made a landmark decision about allowing and adopting the accounting standards of the IASB from the year of 2005. The Financial Accounting Standards Board determines and issues accounting standards in the United States of America. And, the Securities and Exchange Commission (SEC) is authorized to override the standards developed and issued by the FASB. Companies doing business in America are required to develop and issue their financial statements in accordance with the accounting standards and accounting frameworks developed and issued by the FASB. Financial and management accounting Financial accounting is defined as a system of gathering and processing financial information with an aim of helping and serving numerous decisions; which are to be made by different external and internal users of financial information. These numerous users of financial information have different aims and objectives. It is the role of their objectives that determines the use of financial information. On the basis of their objectives, they evaluate and analyze the contents of financial statements and financial information. Present and potential investors or shareholders, suppliers, lenders, employees, customers, media, government and audit companies can be users of financial information and financial statements. These financial statements are mostly prepared, issued and published annually; it also depends on a company policy or the requirements of specific regulatory body. In these financial statements, companies provide the figures of gross and net profits, dividends, return on assets and earnings per share. On the basis of provided financial statements and financial information, internal and external users determine and decide their relevant economic and financial decisions. Internal users also need some management accounting information as well. Management accounting is a practical technology-collecting tools and employing people in practical situations (Vaivio, 2007). Managers and department heads greatly need management accounting information. With the help and use of management accounting, organizations become in a position to highlight and evaluate their annual and semi-annual performance. On the basis of this evaluation process, organizations become in a position to identify those factors that have hindered them to obtaining and retaining their organizational and budgetary goals. Additionally, management accounting also points out those factors that have helped organizations to achieve their organizational goals. This use of management accounting is of paramount importance. By knowing the supporting and the hindering factors in an attempt to achieve organizational goals, organizations become in a position to revamp their current internal management accounting policies in the most appropriate and required way. Since the use of the management accounting tends to be more internal than external in nature, less amount of regulation is provided; and it has been left up to organizations to decide upon and implement their management accounting policies that they feel appropriate and better. Regulation of financial accounting Regulations play a significant role. It is the use of regulations that ensures that societal objectives at large are properly cared of and they are valued. Since the field of accounting is highly complex and technical in its nature and in its application as well, it is highly imperative to regulate this field. According to the definition of the Oxford Dictionary, regulation is “prescribed rule”. It can be deduced from this definition that regulation is developed and designed in a way to control and direct conduct. Accounting regulations are applicable to all those organizations which carry out accounting practices that are prescribed and determined by the regulatory bodies. Some theories explain further the concept of regulation. Theories like, public interest theory, capture theory, and economic interest group theory. All these theories may not be analyzed in a great detail. However, in order to satisfy the objectives of this piece of research work, important aspects of some of these theories are elaborated. Public interest theory works on behalf of and for the benefit of society at large. The supporters of public interest theory believe that regulations are devised, planned and implemented in order to provide benefit to the members of society as a whole, rather than providing serving the interests of a few. Regulatory bodies have clear objectives that align with the interests of the public interest theory. But, it is not easy for regulatory and accounting standard-setting bodies to completely and totally ensure the attainment of objectives of all members of society. Regulators and accounting standard-setting organizations have a diverse constituency that creates challenges for them to maintain legitimacy (Baylin et al., 1996). Since their decisions affect stakeholders economically, standard setters are required to maintain viability in the face of environmental pressures (Gorelik, 1994). However, they have to put their best efforts to ensure the attainment and retention of the objectives of society by ensuring the implementation of regulations in their true sense. Here, the role of government is considerably significant. The public interest theory assumes that the role of the government as a regulator tends to be a neutral party or neutral arbiter. However, some critics highlight the limitations in this theory; they say that it looks difficult to assume that governments adopt the role of neutral arbiter. One way or the other, governments become in a position where they are required to compromise on their neutral position. Hence, they lose their role of arbiter. Capture theory works against the components of the public interest theory. The capture theory believes that the regulated work in a way to ensure that the related regulations should be planned, devised, and implemented in a way to serve their objectives. The regulated put their best efforts in order to ensure that the regulations must be developed and adopted to benefit their corporate objectives. For the attainment of their objectives, the regulated adopt every possible means necessary to serve their interests. Economic and social impacts of accounting Accounting impacts socially and economically on the different segments of society. Organizations make their internal and external policies. These internal and external policies directly or indirectly impact the society. For instance, accounting policies can affect the values of assets and liabilities and their reported profits and other related financial and non-financial information. On the basis of these accounting policies and accounting procedures, members of society develop a particular pattern of perceptions about these organizations. More particularly, in order to further understand and explain the impacts of accounting and accounting regulation, understanding of theory of economic interest group greatly explains the impacts of accounting. This theory assumes that the regulators and other individuals are greatly inspired by their self interests: They prefer to ensure the achievement of their vested interests at the cost of others. Additionally, this theory believes that the regulators are not in a position to justify their required role in its true and real sense; the regulators cannot be an impartial arbiter rather they are considered as an interest group. In order to strength this argument, this theory highlights the members of the regulatory bodies prefer to retain their powerful positions. For that purpose, they are required to serve the interest of those business and other powerful giant business groups which are in a position to support and help the members of the regulatory bodies to retain their powerful positions. Here, political parties play their role by helping members of the regulatory bodies to gain and retain their positions. In return, the members of the regulatory bodies are required to serve their interests at the cost of the society. For instance, industry groups may lobby to reject or to accept a particular accounting standard. Also, this theory clearly challenges the concept of financial accounting as it should be objective, apolitical and neutral. As the financial accounting has a direct link with the distribution of wealth among different members of society, undoubtedly, the financial accounting cannot remain neutral, apolitical and objective. The impartiality of financial accounting cannot be established due to its very nature. Additionally, setting accounting standards is undoubtedly a political activity as it directly influences the social set-up and well-being of the wide range of members of society. International Accounting: Reporting and Issues Numerous factors provide variations in the accounting and financial systems. Among them, financial and capital markets, accounting profession, ownership of enterprises, legal and political factors, economic and social factors and culture as well. In order to minimize the impacts of these factors on the entire field of accounting and its reporting requirements, the International Accounting Standards Board (IASB) is working hard in developing and issuing such accounting standards that could be applicable globally. Due to its constant and relentless efforts, the accounting standards of the IASB are being accepted, implemented and enforced by different countries, including Australia and some other developed and under-developed nations of the world. However, still many countries have not fully subscribed to the International Financial Reporting Standards (IFRS), including the United States of America. Benefits from the global acceptance and application of IFRS International investors would greatly benefit from the global adoption of the IFRS. If the accounting standards become globally applied, the international investors would be in a position to clearly understand and evaluate the financial information and financial statements of the local and international companies as well. This would help the international investors deciding about the most lucrative investment companies. Additionally, currently international investors do not fully understand the financial information and financial statements of other foreign companies due to presence and adoption of different accounting standards. For the purpose of understanding and evaluating the financial information and financial statements of other companies, the international investors are first required to understand the accounting standards of the companies. Afterwards, they become in a position to channelize their economic and financial decisions in the most appropriate way. Furthermore, adoption of single accounting standards globally would require companies to develop and issue one set of financial statements. Consequently, this would not only save their time, but also their save their cost as well. Moreover, a current perception that the global adoption of the IFRS will lead to more accurate, comprehensive financial statement information would be practically proving its significance. IFRS and America For many years, America was reluctant to implement the accounting standards issued by the IASB. But, now, it has changed its decision and decided to adopt the IFRS by the year of 2015. Many corporate events caused America to change its policy towards the adoption of IFRS. First, the debacle of Enron and other big companies greatly questioned the validity and acceptability of existing accounting standards. Second, the current accounting standards in America are more ‘rule-based’ rather than ‘principles-based’. After sometime, a consensus started to emerge that the ‘principles-based’ are more effective in reducing and minimizing the chances of accounting related frauds. Furthermore, many companies agree that the convergence rather than adoption of the IFRS is a better and appropriate option. On the issue of instant adoption, many companies are less optimistic and less hopeful about the possible benefits of instant adoption. But, some critics do not agree with the single set of global accounting standards, they doubt and question the benefits of single set of global standards and the need of having one single accounting setting body (Ball, 2006; Sunder, 2008). For example, Bloomfield et al. (2010) opposes the mandatory wholesale adoption of IFRS by all U.S. corporations, and favors allowing these companies to select from the US GAAP or IFRS. On the other hand, Jamal et al.(2010) raise concerns over governance and financing mechanisms of the IASB. While Bradshaw et al.(2010) supports the continued convergence rather than near-term adoption. Although the arguments approving and disapproving exist in the corporate environment of America, yet America has decided to adopt the IFRS by the end of 2015. Conclusion Accounting practices started in the thirteenth and fourteenth century in the Northern Italy. The concept of double-entry system was adopted by the then accounting related individuals. With the passage of time, different accounting bodies came into existence to serve the field of accounting and accounting practices. In the year of 1934, US Securities Exchange Act was passed requiring and necessitating companies to disclose their financial information. In the year of 1946, Institute of Chartered Accountants in Australia came and issued five recommendations on Accounting Practices. In UK, in the year of 1970, Accounting Standards Steering Committee, later it was renamed as Accounting Standards Committee, established the development of fundamental and mandatory accounting standards. Then, came the IASB and it replaced IASC in the year of 2001. Different regulators are established to ensure the accounting related regulations are implemented as they are recorded in standards. These regulatory bodies are assigned by the governments. Since the impacts of accounting on society are considerably significant, and it is the nature of accounting standards that considerably distributes wealth in society, the vested groups try to influence the regulators. The vested groups put their every possible effort to influence the regulations to devise and issue accounting standards in a way to serve their interests at the cost of society. However, these groups are not so much strong enough to change all regulations in a way they want. Since other groups of society have great stakes and interests in the accounting standards, the regulators prefer to serve the objectives of society, rather than the objectives of a few groups. References 1. Ball, R. (2006). International Financial Reporting Standards (IFRS): pros and cons for investors, Accounting and Business Research, Vol. 36 pp.5-27. 2. Baylin, G., MacDonald, L., Richardson, A.J. (1996). Accounting standard-setting in Canada, 1864-1992: a theoretical analysis of structural evolution. Journal of International Accounting & Taxation, Vol. 5 No.1, pp.113-31. 3. Bloomfield, R., Christensen, T., Glover, J., Haka, S., Jamal, K., Ohlson, J., Penman, S., Petroni, K., Tsujiyama, E., Watts, R. (2010). Comments on the proposed SEC's 2010–2015 draft strategic plan. Accounting Horizons, Vol. 24 pp.109-15. 4. Bradshaw, M., Callahan, C., Ciesielski, J., Gordon, E., Hodder, L., Hopkins, P., Kohlbeck, M., Laux, R., McVay, S., Stober, T., Stocken, P., Yohn, T. (2010). Roadmap for the potential use of financial statements prepared in accordance with International Financial Reporting Standards (IFRS) by US issuers. Accounting Horizons, Vol. 24 pp.117-28. 5. Deegan, C., M., (2009). “Financial Accounting Theory,” Australia: McGraw-Hill Australia. 6. Gorelik, G. (1994). The setting of accounting standards: Canada, the United Kingdom, and the United States. International Journal of Accounting, Vol. 29 No.2, pp.95-122. 7. Hussain, Md. Mostaque. (2005). Management accounting performance measurement systems in Swedish banks. European Business Review. Vol. 17. Iss. 6. http://www.emeraldinsight.com/journals.htm?issn=0955-534X&volume=17&issue=6&articleid=1528640&show=html ] 8. Jamal, K., Bloomfield, R., Christensen, T., Colson, R.H., Moehrle, S., Ohlson, J., Penman, S., Stober, T., Sunder, S., Watts, R. (2010). A research-based perspective on the SEC's proposed rule – roadmap for the potential use of financial statements prepared in accordance with International Financial Reporting Standards (IFRS) by US issuers. Accounting Horizons, Vol. 24 pp.139-47 9. Sunder, S. (2008). IFRS and the accounting consensus. Un-published working paper, Yale University, New Haven, CT. 10. Vaivio, Juhani. (2007). Qualitative management accounting research: rationale, pitfalls and potential. Qualitative Research in Accounting & Management. Vol: 5 iss: 1 [Available at: http://www.emeraldinsight.com/journals.htm?issn=1176-6093&volume=5&issue=1&articleid=1714185&show=html ] 11. Wood, F., & Sangster, A. (Eds.). (2008). Business accounting. Delhi: India. Person Education South Asia. Read More