Does the Way in which Accounting Represents the World Facilitate the Control of Organizations - Essay Example

?DOES THE WAY IN WHICH ACCOUNTING REPRESENTS THE WORLD FACILITATE THE CONTROL OF ORGANIZATIONS? INTRODUCTION The concepts of control and organisations are closely interrelated because the control is a primary requirement of all human organisations and all organisations imply control. Therefore, the concept of the organisations without control is actually not possible. Controlling the organisation is important to achieve the organisational objectives and purpose and through process of control, it can be ensured that organisation is adapting to its environment and moving on the right track to achieve its goals. An organisation, first aims to control its internal activities through different mechanisms. One of the mechanisms which is considered very important when it comes to discuss the control of organisations is the use of accounting methodologies and practices. Various accounting control systems are considered very important to ensure the internal control of organisation and also to enhance the capability of organisations to fulfil its accountability towards the environment. In addition to the accounting control systems, organisations have also developed various other tools such as good human resource management practices, policies and rules and other mechanisms to ensure the control of organisation, however, it is generally believed that accounting is central to all kinds of mechanisms of control of organisations and it is the most effective mechanism to ensure the control of organisations. Therefore, it is argued that accounting control systems are developed to provide internal and external control to the organisations. On the other hand, another group critiques the existence of accounting in the control of organisations. The point-of-view of this group can be studied in the context of failures of big giants like Enron, Wall Street Crisis and recent financial global crisis. Most of the researcher agrees on the fact that accounting plays an important role in the control of organisations however, to what extent accounting plays the role and whether the way in which accounting plays represents the world facilitate the control of organisation or not, are some important questions which are still debatable. The aim of this report is to study the ways through which accounting plays its role in the control of organisations. DISCUSSION Accounting Accounting is considered as a language of business which has a standard set of rules that are used to measure the financial performance of the company (Libman & Feldman, 2007). Signhvi & Bodhanwala (2006) have defined accounting as an information system which recognises the business transactions through records and these records communicate the economic events to the stakeholders or interested parties. Accounting plays a very significant role because it portrays the image of the company through various accounting methodologies and practices. How different accounting practices facilitate the control of organisation is directly linked with the areas of accounting that enhance the accountability of various aspects of businesses. Accounting can be divided into various domains which cover different aspects of business. Signhvi & Bodhanwala (2006) have identified four branches of accounting which are playing their roles in different areas of organisations. Financial Accounting is the area of accounting in which the financial events and transactions of the company are identified, measured, recorded, classified, summarised, analysed, interpreted and communicated. Through this branch of accounting, the organisation seeks to keep the systematic records and communicates the financial performance of the company to the interest parties. Cost Accounting is the area of accounting which deals with the control of the cost of the product, process or operation. In this branch of accounting the costs are measured the information is used for decision making. Management accounting is the area of accounting which uses the accounting methodologies to provide the information that is important for the planning and control of management activities and decision making. The managers usually determine the impact of decision-making on their businesses through the management accounting information. Social Responsibility Accounting is the area of accounting which identifies measures and communicates the social influence of business decisions and it makes the organisations accountable for their actions in the society. The branches of accounting as defined by Signhvi & Bodhanwala show a significant influence of accounting on various aspects of business. For example, financial accounting seems to play a significant role in portraying the true financial image of company for its interested parties, cost accounting seems to play role in enhancing the internal cost control of company, managerial accounting seems to play role in controlling the decisions of management and social responsibility accounting seems to enhance the accountability of organisations in the society. Control of Organisations The terms ‘control’ and ‘organisation’ are central in the framework of understanding of any modern business because they are critical to the structuring and running of the modern world and they are the tools which make us to consider the world as a site where power of expert knowledge must work (Hoskin, 1992). To control the operations of an entity is considered as one of the major tasks of the management. The concept of control of organisation is defined as a process of keeping the organisation on its planned track (Ramachandran & Kakani, 2008). With the changing nature of businesses and increasing internationalisation of businesses, the accountability of businesses is increasing thereby, increasing their need to control the organisations. In my opinion, accounting is a dynamic field which demands flexibility and changes with the changing environment and to enhance their control organisations should adapt such changes. Adapting changes is appropriate to create organisational change when they are supportive for the policies, structure, activities and performance objectives of the organisation (Sisaye, 2006, pp.81). For example, various accounting reforms were made after the global recession such as Sarbanes-Oxley Law. These reforms are not effective unless the organisations fairly incorporate such laws and policies in their control mechanisms. Finkler and Ward (1999) have defined the elements of a control system and I am considering these elements of control systems to explain the other tools which an organisation may use to enhance its control. The first element of control system of an organisation is the audit trail which is an accounting element and which records and analyses the entry of financial transactions in records. Second, organisations focus on ‘reliable personnel’ by developing the mechanisms to control the human resource. Third, ‘separation of functions’ is another element through which separation of authority across various functions is done and controllers of each function are accountable for the performance of their functions. Fourth element is ‘proper authorisation’ is another element which enhances the control system in organisations such as authorisation for expenses can help to get greater control on how money is being spent. Fifth, ‘adequate documentation’ helps the organisation to ensure that records of all financial transactions are being maintained. Moreover, physical safeguards, cost-benefit analysis and independent checks are also some other mechanisms to control the organisation systems. The different mechanisms to achieve control of organisations do not only highlight the importance of controlling various aspects of businesses but they also highlight the role of accounting in all mechanisms. For example, in the cost-benefit analysis, the accounting tools are usually used such as in the cost-benefit analysis of a new product development, the sales, profit, cost incurred can be determined by using accounting practices. In the following section, the specific role of accounting in the control of organisations has been discussed. Role of Accounting in Control of Organisations Young (2006) argues that accountants have always been urging for the development of accounting and accounting statements objectives to enhance the uniformity of these statements and to facilitate the accounting choice. Before discussing the role of accounting in organisations to facilitate the control, it is important to analyse the objectives based on which accounting practices were developed and their standardisation was achieved. For example, the connection between a financial statement user and a financial statement can help the organisations to determine what to report in the financial statements and why to report. For example, the statement of changes in shareholders’ equity is of great importance for the shareholders through which they learn the changes brought in their equity over a period of time. Young (2006) argues that with the changing environment the demand for uniformity in accounting increased and standardising of accounting concepts became difficult for organisations. Therefore, international financial institutions were created so that the uniform accounting practices could be promoted and standardised accounting tools could be introduced so that the users of accounting information could better use the information. Young argues that the accounting standards allow the users of financial statements to do calculations and make efforts to understand the organisations for the sake of economic decision making. The opinion of Young supports that accounting information facilitates the economic decision making both of the organisations and the users of accounting information. Accounting is considered to play a very significant role in the control in the organisations. Ramachandran & Kakani (2008) argue that control systems of an organisation are closely connected with accounting because accounting provides a measurement system and necessary information to the controller (e.g a manager) who ensures that the organisation is on its track and also makes the corrections if required. Accounting reveals the financial performance of a company which is very important for the people like officers of the firm, investors, lenders and general public. Moreover, the standardised tools of accounting like standardised financial statements become the benchmark of communicating financial performance of the company to its stakeholders (Libman & Feldman, 2007). On the other hand, various researchers consider such accounting tools as another way for organisations to masquerade their activities legally. Young & Chwastiak (2003) argue that annual reports which are supposed to build a true picture of organisations depend upon the silencing of injustices to make the profit of the company appear as an straightforward measure of success of company. Therefore, rather than showing the world and stakeholders the contributions of the organisations towards its stakeholders, the annual reports become a way to promote the profitability of the company. The accounting practices are capable of being changing according to the changing business needs and environment. O’Leary & Miller (1987) argue that one concept of accounting considers accounting as changing, or able of being transformed, as a result of the demands articulated or inferred by the changing environment. They argue that historical incongruities of accounting with its environment in the past have improved the effective resolutions of such incongruities in the present. O’Leary & Miller have explained the implications of this concept by studying the history of standard costing and budgeting and they have considered accounting as a contributor towards providing tools for the implications of employees in the organisation and society. This point-of-view suggests that need of increasing control in organisations has been possible through accounting). Armstrong (1987) has studied the benefits of activity-based cost management which is an advanced stage of development and promoted by big five accounting firms and professional bodies. The activity-based cost management was created as a solution to the allocation of indirect costs in the cost accounting. With the changing market environment, the difficulties for the organisations were rising like how to allocate costs. Previously companies were used to allocate cost based on a single cost allocation based however, because of the increasing capital intensity of production process and as a result of enhancing product market competition indirect cost allocation became difficult for the companies. Through the activity-based cost management the staff activities were reduced and management consultants were able to gain short-run cost savings. The research work of Armstrong shows the capability of organisations to change the accounting tools with the changing needs of the business. Bryer (2006) argue that accounting has become an important management control system in the organisations and by studying the labour process theory of Marx, he argues that accounting plays a central role in the control system of organisations because it provides the senior managers with the objective measures of the production and realisation of surplus value and enhances the accountability of organisations. Accounting has played an important role in the development of various calculative programming and techniques which helped to monitor and regulate the people at workplaces in the early twentieth century (O’Leary & Miller, 1978). The financial legislation of Sarbanes-Oxley (SOX) has enhanced the internal controls and mandatory certifications for the top executives for the accuracy of financial reporting (Walther). O’Leary & Miller (1978) argues that at organisation level, the standard costing and budgeting has contributed to a range of activities of the individual to be rendered accountable and transparent. McSweeney (1997) gives the example of cash flow statement and highlight that according to FASB (1980) some accounting representations are surrounded by uncertainty such as the case of allocation of costs to one or more categories. However, the research work of McSweeney shows that neither the current nor the reformed practices of accounting make the unequivocal representations because the quest of that unrealisable model is however absolutely real and extremely prolific. To prove his hypotheses, McSweeney toll the examples of accrual and cash flow. The role of accounting in organisations is also evident from the fact that today investors, general public and government agencies are more able to follow analyse the practices of the organisations. The failures of big world giants do not the limitations of accounting but they show the power of accounting to enhance the accountability of these organisation. Limitations of Accounting Various limitations of accounting practices have been identified which limit the ability of the accounting to draw the true picture of organisations, thereby, leading to misleading information and reducing the control of organisations. Window dressing is another major limitation of the financial statements (Thukaram, 2007) which are usually considered as the major source of information from an organisation. In the world, organisations keep struggling for resources and by taking the information from the financial statements of competing firms, a company can develop its own control systems, however, the issues like window dressing reflect that organisations may not reveal the accurate information about its operations. This point-of-view suggests that it is not necessary that the way in which accounting represents the world facilitate the control of organisations because businesses can portray misleading and non-transparent pictures through the manipulation of accounting tools. Young & Chwastiak (2003) argue that financial statements of the corporations generally report the important strategic events such as downsizing, acquisition etc however, they show a very little concern towards the social consequences of their business decisions. Young & Chwastiak actually see the limitations of accounting tools to report their impact on environment. By choosing the different sections of the annual reports of the various companies, Young and Chwastiak highlight the silences of the annual report. For example, they quote the statement of Johnson & Johnson (published in its financial report) which tries to convince the people to buy a line of toiletries which target the females of 13-25 years through acknowledging the formula, research and ingredients of the product. Young and Chwastiak argue that companies are seeking to control the perceptions of people to develop and expand their own market. Therefore, annual reports have become more like the promotional tools for the companies to attract the investors and public rather than fulfilling their accountability requirements. Lehman (2005) argues that accounting has been playing a significant role in control of organisations however, in future the role of accounting can become limited therefore, and there is a need to explore more on how the role of law and new institutions of global governance can help the business to keep a separation between organisations’ accountability and politics. Lehman has given his perspective on the harmonisation of accounting in the globalising world. The point-of-view of Lehman is based on the changing patterns of globalising capitalism therefore; he focuses on the need of a new accountability model in the modern system. CONCLUSION Based on the above discussion and analysis, it can be concluded that organisational control has become an unavoidable need of every organisation. Companies have developed their own control systems to fulfil their accountability towards their stakeholders. Accounting plays a very significant role in providing the control to organisations and to fulfil its accountability requirements. The standardised tools have been developed in accounting so that by following these standardised tools, the organisations can improve the control over their systems and processes in a uniform and transparent manner. Unlike various other systems which have been developed to achieve organisational control, like human resource management systems, accounting appears to be the most effective mechanism. Accounting involves a diverse range of concepts and practices which have allowed the organisations to achieve control. Financial reports, costing-accounting methods, managerial accounting practices and social responsibility accounting are the four major areas in which all methods and practices of accounting fall. The practices and methods in accounting have not only enhanced the sound and logical decision-making of the management of the organisations but they have also enhanced the transparency and fairness of operations and functions of the organisations. The development of the international financial institutions and the standardised rules and policies incorporated in the accounting legislative framework are the major hallmarks of accounting in organisational control. Moreover, with the changing needs of the businesses and increasing external influences, accounting reforms are being made which reduce the problems of control loss. Although the role of accounting in control of organisations is really appreciable however, a few limitations of accounting have been also identified. The major limitations of accounting include the manipulation of accounting figures, financial transactions and financial reports. However, the international financial accounting institutions are making their best efforts to reduce such limitations. Therefore, it is concluded that accounting plays a very significant role in organisations and they way accounting represents the world is actually a facilitator in the control in organisations. Bibliography Armstrong, P. (1987) Management, image and management. Critical Perspectives on Accounting. 13, pp. 281-295 Bryer, R. (2006) Accounting and control of labour process. Critical Perspectives on Accounting. 17, pp. 551-598 Finkler, A. S., & Ward, M. D. (1999) Cost Accounting for Healthcare Organisations: Concepts and Applications. 2nd Edition. Jones & Bartlett. Hoskin, K, (1992) Control, organisation and accounting: A genealogy of modern knowledge-power. Systematic Practice and Action Research. 5(4), pp.425-439 Lehman, G. (2005) A critical perspective on the harmonisation of accounting in the globalising world. 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