If Accounting Is to Retain Any Credibility, Then Without Credibility It Is Worthless - Essay Example

“If accounting is to retain any credibility-and without credibility it is worthless” This paper is directed to give an explanation to the fact that the credibility of accounting is core for the accounting information to remain with some worth. It is true that the task of accountants is to provide information that is free from bias, which is directed to be used for decision-making by the officers who are concerned with both social and economic issues in an organization (Sims & Quatro 2005). Though the faithful representation of the economic phenomena may be a challenge at times for the accountant, it should always remain their goal. It is against Tinker’s prophetic confession that accounting policies ought to be chosen for their supposedly desirable economic consequences rather than their ability to depict relevant situations faithfully. Accountants are reporters just as journalists and they are therefore endowed with the task of reporting faithfully any financial transactions that the company engages in. In the recent years, the roles of the accountants has greatly changed, these changes are in line with the changing regulations and business laws though from research there are indicators that there is a perception gap between the profession and the public and this is with regards to trust. The major contributor towards this is the ignorance hence lack of understanding of the public of the roles of the accountants in business growth, which is a crucial component of economic growth and recovery. The credibility of the accounting information assumes that the accounting information does not comprise any significant error or subjectivism, therefore it faithfully presents image of the process or phenomena (Previts, Robinson & Chandar 2007). The conceptual frameworks upon which credibility is ensured comprises of detailed elements, which ensure the elements are appropriate in terms of content. It is therefore appropriate if the accounting information is objective that is the transactions and events are faithfully mirrored (Previts, Robinson & Chandar 2007). This means that the transactions and events reflect the true meaning and consequences of economic events alongside the legal requirements. The information has to be neutral i.e. avoid influencing a decision or issuing a judgment for the accomplishment of any pre-determined objective. The display of transactions faithfully in the primary elements, which ensures the credibility of the information, provided in the statements. This ensures a balance between the information provided numerically and in a described manner concerning the information’s inductive phenomena. For the sake of the generation of faithful information, there has to exists a transaction or an event which is embodied upon the balance sheet level regarding the display of the elements concerning the corporation’s assets, debts, and own capital (Sims & Quatro 2005). For instance, if a company expects to occur a doubtful dept in its financial statements of let us say 40,000. For the sake of faithfulness of the statement, it is vital to check the- If there was a sales which resulted into the debt in the past That the due date of paying up for the debt has been exceeded without postponement Is the 40000 debt believable, are there documents to show the same Confirmation of the probability of cashing it in the future.. The description of transaction and event in the financial statements depends on the rights, obligations and available economic resources. In addition, their ascribed significance, on the assessment grounds and on the display techniques used to recognize them in the financial statements is also of fundament. If financial information is manipulated in order to achieve a given result instead of merely reporting faithfully reports on economic events and activity, it is obvious that the resulting information will be biased (Solomons 1986). This is against the principal of neutrality as neutral information is biased. Therefore, it means that the information will never have value to the investors and other users who depend on such information to make investment decisions (Previts, Robinson & Chandar 2007). For example, investors to evaluate the growth propects of the company use financial disclosures frequently, they as well use such information to evaluate on the riskiness and project the long-term success of the company or business model. Furthermore, the analysis also provides the investors with the inputs they will need to price individual securities while, making a portfolio decisions. In sum total, the overall, the quality of investors’ pricing and capital allocation translated into the efficiency and the effectiveness of the financial information will largely depend on the neutrality of the available accounting information. It is normally a challenge when the financial disclosures do not show the actual economic situation of the company; this is visible when the prices of securities plus the amount of capital allocated to companies does not reflect the corporation’s actual economic position (Solomons 1986). For example when a company, which is suffering losses, is made to appear that they are making profits through selectively omitting some expenses from the income statements of the company. This is likely to motivate investors who are not aware to price the securities quite favorably than the actual pricing should be and as a result allocate larger amounts of their limited capital to the company than they would otherwise have basing their judgment on incomplete information. Such form of incredibility misleads hence is worthless due to lack of neutrality of the information. Accounting can be neutral and unbiased when prepared by qualified financial officers in the proper manner saving investors from such forms of messes (Reckers 2003). Moreover, a pieces of information is only believable when if it is not influenced and such neutrality is ensured when by the mode of information selection ans display, the decisions arrived at together with the judgment selected by the management are not in any way influenced to justify the outcomes. The requirements of neutrality does not only refer to the possibility of choosing among varied accounting methods which would generate a variation in terms of the information displayed, but also to the accounting gaps which allow the accountants to involve themselves exhaustively in the information contents. This should never be accompanied by the same accountants being mistaken for an exclusion of the purpose governing the formulation of the financial statements. According to Corporate accounting practices: is there a credibility GAAP (2002), lack of neutrality and therefore lack of bias in the past few years investors have lost a lot of money in terms of billions of dollars plus their savings and other productive capital. These forms of misstatements are quite risky for businesses; this is because when such unethical misstatements are known, the companies collapse which is not only bad for the capital by the investors but also affecting the investor confidence worldwide. This is to mean that reporting problems by one company does not mean only a problem to that company. In addition, the prices that investors would be willing to pay for the securities of the other companies are affected (Reckers 2003). The setting up of financial reporting standards has been a cause of disagreement for many companies simply due to the reason that some of the regulators would wish to set such standards in a manner favoring their interests. This contentions are though considered healthy part of the standard setting process since it would lead to the enhanced quality of the set standards to be in the position of attaining neutrality hence unbiased financial disclosures if the deliberations are carried on to the last point. In case the debates are cut short, the detriment is channeled to the investors and the financial markets, which are, threatened given that the achievement an objective or faithful representation of the economic state. It is therefore important for the investors to have quality information before risking their scarce funds and alongside this, their confidence will only be aroused by the reliability and neutrality of such information. If investors realize that they can no longer rely on the financial reporting systems to get the information they need to make decisions (Ittelson 1998). According to has sector neutrality had its day?. (2010), the investors will detect a looming catastrophic risk and financial reporting risk. They can only be convinced to bear such risk through being promised future higher returns, which they can achieve by being extended a leaf and being allowed to reduce the prices they would pay for all the securities (Ittelson 1998). According to James J. Leisenring, former Vice Chairman of the FASB and currently a member of the IASB, in his article, “The Meaning of Neutral Financial is reporting,” said, The dissemination of biased and thus potentially misleading information is bad for all interests in market-driven economies. Even a perception that the information has been manipulated may have significant adverse consequences for the cost and availability of capital. This further proves that credibility will have will be worthless because of the incertitude, which appears in certain events and scenarios of the company in question. The incertitude’s must be displayed in terms of nature and value while assessing them with a lot of caution. For credibility of the financial statements to remain worth what it should be, assets and incomes must never be overstated while the debts and expenses should also be valued correctly (Arnold 2005). Highly cautious values must also not be displayed, as they would eventually affect neutrality. Entirety or completeness is the other element, which ensures that information is credible. This implies that all the financial information is completely displayed within the reasonable limits, which are justified by the impossibility of to display the elements accurately. Neutrality is vital for financial information to remain credible and with the worth; it deserves (Solomons 1986). References Arnold, V, 2005, Advances in accounting behavioral research, Elsevier JAI: Amsterdam. Corporate accounting practices: is there a credibility GAAP? : hearings before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises of the Committee on Financial Services, U.S. House of Representatives, One Hundred Seventh . (2002), U.S. G.P.O.: Washington. Has sector neutrality had its day?, 2010, CAJ: Naperville, Ill. Ittelson, TR, 1998, Financial statements: a step-by-step guide to understanding and creating financial reports, Career Press: Franklin Lakes, NJ. Previts, GJ, Robinson, TR, & Chandar, N, 2007, Research in accounting regulation. Elsevier JAI: Amsterdam. Reckers, PM, 2003, Advances in accounting (12th ed.), Elsevier Science: Amsterdam. Sims, RR, & Quatro, SA, 2005, Leadership: succeeding in the private, public, and not-for-profit sectors, M.E. Sharpe: Armonk, N.Y. Solomons, D, 1986, Making accounting policy: the quest for credibility in financial reporting, Oxford University Press: New York. Read More