Accountability, representation & control - Essay Example

?Accountability, Representation & Control Inserts His/Her Inserts Grade Inserts 11 Introduction Accounting is the means to measure performance and maintain control in the organization. All organizations and businesses utilize some form of accounting whether it is basic ledgers or management and cost accounting. Accounting is the means to identify elements of sales, expenditure and profit as well as budgets, inventory and forecasts. Thus it is a method of achieving accountability as it monitors and accounts for every financial transaction and thus keeps a check on fraud, embezzlement and suspicious acts within the firm. However, accounts focuses on quantitative rather than qualitative data. It does not measure qualitative performance data such as satisfaction, achievement of goals, job commitment and quality among others. Accounting does not take into account the environmental degradation, labor practices, work environment and safety rules and regulations. Thus the issue of whether accountability in an organization is best measured by accounting is a complex one. Accountability is the willingness to assume responsibility for one’s actions. In the organizational context, every employee is responsible for his actions at the workplace and thus he should be held accountable for them. In order to be effective in maintaining accountability within the organization, organizations need to be focused on setting goals that are measurable and train employees to feel accountable for their actions. Consequences of their actions should be predefined and communicated and the organization should implement the rules that it has set. (Building Organizational Accountability). Apart from internal accountability, the concept of the organization being accountable for its actions is extremely important. As organizations develop into powerful systems that affect the world and its citizens they need to be held accountable for their decisions and policies. Accountability in the financial context does control performance and finance; however it is not really effective in controlling child labor and sweat shops. Is accounting the most effective means of achieving accountability in organizations? All organizations are involved in book keeping; they keep accounts of their costs and expenditure and their sales and revenues. This results in accountability of the actions of managers and employees. At a higher level for corporations, audits provide accountability for processes and procedures as well as transparency and accuracy of accounting records. Internal audits result in employees being accountable to the company for their actions and external audits result in the organization being accountable for its procedures and policies. The Enron case resulted in stricter guidelines for organizations regarding representation, transparency and control. The Sarbanes Oxley 302 and 404 focus on corporate governance and practices that better control the organization’s practices and prevent corruption. However, as accounting and auditing deal invariably with financial aspects and maximization of shareholder value, it is vital to establish the basics of accounting which is cost. The concept of cost is the fundamental of finance. However, in accounting cost is monetary cost associated with consumption of resources whereas in economics cost includes opportunity cost which is the cost of foregone alternatives. In actuality, consumption of a resource leads to many costs including the cost to society, cost to environment and other living things for example; an organization manufacturing furniture will only take into account the cost of labor, materials and processes but not the costs of deforestation and environmental degradation. Thus the concept of cost used in accounting is limited and hence every control or measure implemented by accounting methods is limited to that definition of cost that does not hold the organization for costs it imposes on others. (M. Chwastiak) This results in the narrow concepts of success and profitability. Organizations are focused on cost cutting and on increasing profit margins with the common goal of maximizing shareholder value. They do not take into account costs imposed by their cost cutting such as layoffs and decrease in health benefits or decreases in standard of living or abject poverty in countries that manufacture their products. The singular objective of profit maximization is cut throat and exploitative to all parties involved. The current concept of accounting and regulation ignore social aspects of the issue. They focus on accountability as a financial and numerical issue whereas organizational accountability is much more than this limited view. In the publishing of annual reports, there is a section on corporate governance and social responsibility full of platitudes but it ignores the real issues. When a corporation makes decisions to set up factories, or downsize to increase profits or cut costs, is it held accountable for the consequences. Organizations are solely focused on capitalistic gains and that is what accounting measures. Companies not only treat the environment as a means to an end but their employees as well. Healthy and safety requirements are fulfilled to the minimum extent to safeguard from lawsuits and to keep costs low. Worker safety is a concern if it leads to sick days and loss of productivity but not due to social obligations. Only when organizations are regulated they cut down on fuel emissions and pollution to reduce fines. Organizations are only concerned with increasing markets through promoting mindless consumption and not only ignore their responsibility to society and environment but to their employees and markets as well. Thus accountability through accounts is focused on how costs and finances are appropriated, whether resources are being efficiently utilized and whether monetary gain is being realized. Audits focus on whether the company is following regulated processes and transparency of processes, budgets and targets are being met and process controls are being met. The focus of all these accounting controls is to streamline processes, keep better records and regulate the company in order to improve the performance of the company and increase profits. Accounting does not consider any other objective or implication and does not hold organizations accountable for any other action apart from financial and managerial actions. Thus accounting is insufficient as an accountability measure and does not hold the organization or managers truly accountable. However, accounting is an effective method in providing accountability in the organization. Accounting regulates not just cost and profit but rather management processes and allocation of resources. It provides performance measures that enable the corporation to develop strategies to achieve goals. It enables better decision making within organizations and helps managers in risk mitigation and strategic management. Accounting principles and methods help in regulating the company, it allows comparison and analysis of the company’s performance and helps in forecasting for the future. It maintains process controls and appropriation of budgets as well as costing and book keeping. Accounting standards streamline the records of all organizations and thus make records transparent. Audits and the publishing of annual reports results in accountability of the organization. Management accounting provides management control and accountability throughout the organization. Accounting practices can revamp an entire organization and turn its course as can be seen by the Britech example. The integration of cost into every part of the process and the transformation of employees into ‘cost conscious’ agents made the employees focused on cost and profits. From engineers to shopfloor, the accounting changes helped revitalize the company and make it more commercially driven. The management started to focus on a more holistic approach to performance by concentrating on value and developed a different approach to time management. They focused on effective use of resources and time rather than just man hours, value added was accounted for each assembly stage and thus statistics were kept for every product against the business plan. This approach to accounting developed a different aspect of accountability, it focused on how every process and every employee added value to the product and process and thus made accounting value driven. (M.Ezzamel) Accounting fraud came into public eye in the early 2000s, with Enron heading the list. Big companies such as Waste Management, Cendant, MicroStrategy, WorldCom and Tyco among many others were exposed for accounting fraud. Enron was accused of accounting manipulation and hiding its debt. Details included the CFO making hidden agreement, the inclusion of investment bankers, auditors, lawyers and financial analysts in the conspiracy and bribes to foreign governments which caused the shareholders to lose $11 billion. WorldCom was accused of underreporting expenses and capitalizing them on the balance sheet. Kanebo in Japan inflated its profits by $2 billion over five years. Waste Management also inflated earnings by accounting manipulation of depreciation. These examples show that small irregularities as a result of accounting manipulation mislead stakeholders into thinking that the company is doing well even when it’s going bankrupt. In these scenarios, the accounting system was not effective in guarding the interests of the shareholders or holding the organization and its employees accountable for their actions. (Giroux) (Bizcovering) The Enron fraud case exposed many inconsistencies and loopholes that could easily be exploited by organizations around the world. The eye opening fact however, was the involvement of the auditors and investment bankers as well. Enron’s auditor Arthur Anderson in 1987 identified the moving of profit from one period to the next in the company and although he alerted the audit committee of Enron, nothing was done about the issue. This shows that underhanded dealings and accounting manipulation had been going on for years before it came to light. Instances of pressure on bankers and analysts by Enron were common and this unveils the true face of Enron. (Giroux) The Enron case resulted in stricter audit controls for organizations. The Sarbanes Oxley Act was passed in 2002 and it increased standards for US public companies and accounting firms. The Act focuses on transparency and accountability to safeguard the interests of investors and streamline reporting and disclosure procedures in public limited companies. It contains eleven titles that focus on corporate responsibility, enhanced financial disclosure, corporate and criminal fraud accountability and corporate fraud accountability among others. The SOX Act led to increased corporate transparency and conservative reported earnings, it also resulted in improved internal controls and increased reliability of financial statements. The Enron fraud case and the following SOX Act made it clear that accounting procures were ineffective as accounting manipulation was easily done by many companies. The need for stricter laws governing accounting representation and the accuracy of financial records was required. However, even after laws are amended accounting loopholes remain, and accountants and auditors of smaller companies can at times get away with misleading representation of data. Accounting methods such as depreciation and inventory valuation methods can be legally used to influence the presentation of the balance sheet which is also manipulation that is regularly done by companies. Accounting is facing many challenges and is no longer the only acceptable measure of accountability. Challenges such as technology, globalization, and loss of professionalism and concentration of power have affected accounting and there is greater need for non financial information than ever before. Corporate governance is another method through which individuals in an organization can be held accountable. Corporate governance focuses on relationships between stakeholders and the processes, policies and laws that determine the governance of an organization. Corporate governance focuses on transparency and disclosure as well as integrity and ethical behavior. There is greater focus on social accounting and corporate responsibility as effective tools for establishing accountability. Corporate social responsibility is when the company takes responsibility of its actions and their effect on society. It is the inclusion of social factors into decision making. Social accounting is now used as a measure of corporate accountability. It is an approach that focuses on the need for organizations to be socially relevant and accountable to society. Thus presently, it is more important for organizations to focus on social, environmental and ethical accountability of their actions which accounting generally ignores. Thus a more effective measure of accountability would be social accounting rather than financial or managerial accounting. Social accounting focuses on more than just financial accounting. It widens the concept of accounting to include more than just economic events and financial variables. It focuses on stakeholders other than shareholders but rather the environment as well and stresses on diversifying the goals of the organization away from financial success. Social accounting takes into account the vital fact that financial accounting ignores which is the effect on the external environment of a company’s actions. Social accounting advocates accounting for these factors as a part of normal accounting procedures. Social accounting leads to accountability in the social and environmental sphere as it focuses on environmental objectives and sustainability. Social accounting identifies the cost and benefits to society and environment of economic gains as well as increasing corporate responsibility and transparency. Social accounting focuses on multinationals as they greatly affect society and environment beyond boundaries. (Crowther) Environmental accounting is part of social accounting and focuses on the organizations interaction with the environment and related costs. Environmental accounting may be in line with legislation and as a part of the company’s financial statements. At times, costs to environment, degradation, damage to wildlife and other impacts are mentioned in the annual report under non financial information. The United Nations stresses the adoption of environmental accounting practices and countries such as Denmark, Netherlands and Australia have legislation that makes environmental reporting compulsory. Companies such as Shell, the Body Shop, BP and British Telecom publish socially audited reports. External social audits regulate social accounting of companies and aims to dissolve the line between corporations and society as whether companies agree or not they are a part of society that they affect and they need to be held accountable for it. Conclusion Accounting is a field of numbers that records and generates financial data. It focuses on records, analysis, and the financial and managerial performance of the organization. It also deals with control and audit and guides the decision making of a firm. It is the basis of performance measurement and the driver of efficiency and utilization of resources. Thus accounting in organizations is the centre for all data. Internal and external auditing is used in accounting to develop accountability of the accounting methods used within the firm. The ethical and moral obligation of organizations to represent and communicate the true picture and performance of the organization is regulated by external audit whereas internal audit accounts for internal processes and procedures. Although accounting may be the language of business it fails to effectively achieve accountability in organizations. This is due to its limited view of accountability and responsibility. Organizations only focus on performance through cutting costs and increasing profits and ignore the costs imposed on the public, society and environment. Organizations need to be held accountable for the impact they have on society and their performance needs to be measured in the ethical context as well. Companies such as Nike have never faced financial reporting issues but have been accused of maintaining sweat shops in third world countries. Accounting does not take into account qualitative factors and only focuses on performance. Organizations are unconcerned with deteriorating conditions and recessions affecting their employees but focus on decreasing costs and profit maximization. They focus on increasing demand and encourage consumption rather than the implications of decreasing resources and global warming. Apart from this capitalistic hunger of organizations which accounting encourages is the failure of accounting in another manner. The Enron fraud case highlighted the loopholes in the accounting system and the ease of misrepresentation and manipulation. Accounting systems are inadequate to implement accountability within an organization as they allow for ‘creative accounting’ and manipulation. Although, this resulted in stricter laws through the SOX Act, it shows that corporate social responsibility, transparency and disclosure requirements are vital to hold organizations responsible. An effective means of achieving accountability would be to opt for social accounting which focuses on the impact of corporate decision making on society and environment. It entails social audits and benefits the society by stressing on goals other than profit maximization. Social accounting includes costs imposed on society and environment as part of the financial reports and includes environmental impact in annual reports. Social accounting is a better means of achieving accountability in organizations. References Berger, Steven. "Achieving results through accountability management - Management Issues ." 4 2002. 7 1 2011 . Bizcovering. "10 Major Accounting Scandals." 12 1 2009. 7 1 2011 . "Building Organizational Accountability." 2009. 7 1 2011 . Crowther, D. "Social and Environmental Accounting." Financial Times 2000. Esser, Jeffrey L. "Measuring performance: accountability is not synonymous with accounting." 1993. Government Finance review. 7 1 2011 . Giroux, Gary. "What went wrong? Accounting fraud and lessons from the recent scandals." 2008. 7 1 2011 . Jeffrey Unerman, Jan Bebbington, Brendan O'Dwyer. Sustainability Accounting and Accountability. Routledge, 2007. M. Chwastiak, J.J. Young. "Silences In Annual Reports." Critical Perspectives on Accounting 14 (2005): 533–552. M.Ezzamel, S. Lilley, H. Willmott. "Accounting representation and the road to commercial salvation." Accounting, Organizations and Society 29 (2004): 783–813. "Management control and accountability of internal audit ." 2006. 7 1 2011 . Thomas, Cathy Booth. "Called to Account." 18 6 2002. Time. 7 1 2011 . watkins, Anne L. "An Accountability View of Accounting." 1 2 2007. 7 1 2011 . Read More