Accounting Technologies in Today's Life - Essay Example

RUNNINGHEAD: ROLE OF ACCOUNTING The Role of Accounting in Society of Introduction This paper seeks to discuss the role of accounting in the society in the light of developments of accountancy from being frequently portrayed as boring, dull and grey in popular culture accountancy to having accounting technologies as central to contemporary life. It is also claimed that accounting calculations have played a key role in the current financial crisis that enabled some to get richer at the expense of others. Moreover, accounting expertise is also implicated in the transformation of capitalism as organizations seek to avoid taxes, dilute employee pensions and wages, and engage in high risk financial speculation. As to whether these developments are a way to signalling how much further accounting research is needed to develop in addressing such factors, is a question that will have to be answered in this paper. 2.1 Accountancy in popular culture is frequently portrayed as boring, dull and grey but accounting technologies have become central to contemporary life. For accountancy to be viewed or considered as culture boring, dull and grey appears to have come from lack of appreciation for its purpose as simply documenting what really happened without connecting to relevance to the present and the future. This could mean like reading or studying history without relating its significance to the present and future events (Turner Publishing Company, 1996). But if sees the relationship of series of events the significance becomes clearer. The same can be said about accounting processes, which had become more palatable by the coming of accounting technologies. The connections of the series of processes involved in the accounting and thereby producing an accurate, objective and relevant information may have made accounting technologies to be invented making the same to become central to contemporary life. In simple terms, the role of accounting in the society can be described as critical as it is essential playing the role of providing information for decision making (Stickney, et al, 2009; Weygandt, et al , 2009. Libby, et al 2010). As to how accounting technologies have become to central contemporary life may be observed in how the same have enable the business world to respond accordingly. One cannot go talk of managing a business organization without the use of accounting information since financial statements which are deemed as sources of the same must be used in order to effectively attain the purpose of management (Kieso, et al, 2007). As management need to accomplish its economic objectives to justify sustainability, the accounting information from the financial statements must its purpose of helping decision makers. 2.2 Accounting calculations have played a key role in the current financial crisis that enabled some to get richer at the expense of others. Essentially there could be no business without accounting since there could be no way to decide whether there is basis to continue doing business. The usefulness of accounting can just be appreciated in the concept of just counting the cost before one goes to war. Technology may have accounting for better use many decision makers, but it has allowed others to become victims while other may use superior application of accounting information for the latter’s advantage. It is also in this light, that the current financial crisis need to be understood in the business organizational level where companies where almost rendered powerless to sustain their operations. Since organizations need to have continuing profitability to be able to be translated to additional wealth to stockholders for the latter to continue holding on to their stock investments in companies, the accounting information from the financial statements must so justify the decision of keep their investments (Brigham and Houston, 2009; Ross et. Al,1996; Van Horne, 1992; Weston and Brigham,1993). The basic financial statements refer to the statement of financial position, profit and loss statements, the cash flow financial statement and the notes to financial statements (Johnson, et al, 2003). The statement of financial position or balance sheet would show much increased wealth in terms of book values of the stocks, as measured by the values of assets of liabilities of the organization (Meigs, et al, 1995), is generated by a stockholder while the profit and loss statement or the income statement would measure the profitability that could either increase of decrease the book values of the stocks. The cash flow statement would make the relationships of the account figures in the balance sheet and income statement more understandable by indicating the sources and uses of cash from operations while the notes to financial statements would explain important and relevant accounts from the three other components of the financial statements – the balance sheet, the income statement and cash flow statement. The values in the balance sheet as source of accounting information may not necessarily reflect the real values or market values of the organization as the same may make use substantially historical cost. The recent accounting standards which are used as guidelines in the preparation of financial statements however compels or allows the use of fair values which may cause fluctuations in the values of the assets, liabilities and equity of an organization, which in effect may disturb or cause the investor as decision maker to make decisions that would have an effect an economy. Viewed in a simple manner, an investor may lose trust of the financial institutions, the banking system and companies selling stock and bond investments. If multiplied in bigger magnitude, the whole economy gets affected and this causes business to rather not go in producing goods and services (Slavin & Slavin, 2010). The effects could include loss of employment, slow economic growth (Nicholson & Snyder, 2008; Slavin and Slavin, 2010; Arnold, 2008; Baumol, & Blinder, 2008) until many parts of society suffers as financial crisis comes in. Although accounting is meant to be for decision making, its role in current financial crisis cannot be discounted in the case where some get richer at the expense of others. For others to get richer at the expense of others imply that some have better information than others. The one who has better information will normally have a better view of what will happen next. By allowing one party to have an advantage over the other is to argue that one has a better access to information and therefore would most like use the information for his/her advantage in making economic decisions. Take the case of an investor who would see an undervaluation of one’s assets. He/she would most probably want to purchase that company since he/she believes that the real value is not reflected in the financial information. The same can be an expected matter to happen considering that financial information basically makes use of historical cost values. This is the reason why there was need to result to fair value accounting where instead of acquisition cost used to value assets, fair value or market value is used and this could be found evident in the case of revaluation of property plant and equipment as well in investments and inventories (Kieso, et , 2007). The fair value thing became more famous in the case of banks (Novoa, A. et al , 2009) which could literally cause a dive in their financial conditions if their investment exposures would reveal a downgrade due to uncertainties brought about by changing economic conditions (Slavin and Slavin, 2010). Such sudden fall in the asset values would therefore have a domino effect on investors where fear would most probably be generated. 2.3 Accounting expertise is also implicated in the transformation of capitalism as organizations seek to avoid taxes, dilute employee pensions and wages, and engage in high risk financial speculation. When organizations seek to avoid taxes, they are effectively availing themselves of what many taxpayers want to do if so allowed under given circumstances. Who would want to pay more taxes to the government? If there is some way to reduce taxes, why not? The effect of avoiding taxes would be disadvantageous to the government but advantageous to the taxpayer in the short-run but it would have also the effect of government of not being able to accomplish its tax collection target. Accounting information needs to be accurate and therefore it implies measurability, which is enhanced by using standards in it production. This is the reason why financial statements of many companies across different countries need to be submitted to regulating and tax agencies of governments. Accounting information may indeed be measuring facts of what happened but it is still has to deal with estimates like depreciation and fair value of assets and liabilities. Thus the unavoidability of estimates may indeed cause some items in the accounting to be not exactly accurate. The most that could be done is to have accounting standards in the preparation of financial statements. Why do organizations dilute employee pension and wages? Why do organizations engage in high risk financial speculation? The reason why organizations dilute employee pension and wages is also to minimize cost in order also to survive in the industry. One reason why organizations may engage in high risk financial speculation is the possibility that organizations’ asset values may have been understated and so there are great uncertainties of the real values of these assets. The lack of accurate information as to the real values of these assets may indeed drive organizations to engage in high risk financial speculation. If there could be reason why investors like Warren Buffet may have built his fortunes from the stocks is the apparently undervalued assets caused by the financial information that could be considered basically for taking advantage the opportunities. The possibilities of creative accounting practice for the purpose of accomplishing the means to survive in capitalistic world comes in the future. This practice may go as far as presenting financial information which cannot be far from being accurate and objective result to better information to the others who know better and less favourable for those who may lack the knowledge of its implications. The practice of creative accounting comes gets neutralized among others by responsive accounting standards and better practices of corporate governance (Solomon, 2007). However, as complexity in business evolves, so does creative accounting. 2.4 How much further accounting research needed to develop if is to address such factors? Accounting research is a continuing process because of the conflict of two important characteristics of useful information --- relevance and reliability. Where there is need to be very accurate and objective about the financial information, the concept of relevance must come into the picture. This would mean that accounting research become a necessary tool in the pursuit of the truth. Research will have therefore the objective of finding the proper balance between the two. Accounting research will have to find itself closely and indispensably connected to issues of improving corporate governance (Financial Reporting Council, 2010) starting with the ethics of financial reporting. Such corporate governance would encompass ethics in business that would argue for transparency leading to accountability for results and transparency (Mead & Sagar, 2006). Financial reporting in such situation assumes a very important aspect if ethics in business need to be promoted. Ethics of financial reporting accepts rightness or wrongness of acts by those who should provide the financial information for decision-making. The value of information provided to decision makers must therefore be very important. Parties involved in in financial reporting may light the path to better understanding of how the benefits of accounting research may be put to use; they are the management, the audit committee, and the external auditor (Braiotta, Jr., et al, 2010). Management as represented by the board of directors acting through its officers prepares a company’s financial statement. Management, as agent for the stockholders and in-charge of the stewardship of business, takes responsibility for financial statements under a principal-agent relationship is assumed. Management responsibility must also publish a company’s financial statements and the same extends to information disclosed. Given that estimates and assumptions need to be used in arriving to the final numbers or figures in financial statements, management must do its parts (Helfert, 2001). Management can improve reliability and relevance of accounting information through accounting policies based on acceptable accounting standards, which company accountants must use in preparing the financial statements. Management responsibility about the reporting process should go as far as reliability and effectiveness of internal control (Whittington & Pany, 1995). Integrated with this responsibility is understanding, assessing and implementing policies to mitigate risk in managing the business. The creation of audit committee within the organization is also a critical to producing reliable financial statements. The composition of said committee of non-executive or independent directors becomes a requirement to accomplish the purpose (Financial Reporting Council, 2010). 3. Conclusion What makes a thing boring, dull and grey issits incapacity to inspire and challenge thinking. What inspires and challenges thinking is the possible inevitable consequences of acting on or not acting based on what such a thing could produce. An information as that provided by accounting can only be appreciated with the consequences of it use, non-use or misuse. Technologies were able to make accounting more challenging because the former allowed the better usefulness of the latter by causing the same to be more understandable and relevant to more number of decision makers. The effects of the more usefulness of the accounting information would then become inevitable to more investors. More investors may have however become vulnerable to the seeming simplicity of accounting information as represented by management of companies selling their stocks or assets to the investing public (Brigham and Houston, 2002). Accounting information although meant to become reliable because of the use of historical values may be misused by unscrupulous people by presenting their companies better than they should actually be. Accounting expertise from the preparation of financial statements becomes also then a necessary factor in causing people to make decisions in a capitalistic society. Thus, there is a strong ground to see the assertion that accounting expertise is also implicated in the transformation of capitalism where organizations seek to avoid taxes, dilute employee pensions and wages, and engage in high risk financial speculation. Indeed there is basis to conclude that these developments signal the need for accounting research in addressing such factors earlier described. Previous research resulted to producing accounting and other regulation through the use of standards, improving corporate governance by having management accountable with is responsibilities in the latter role in the preparation of financial statements using proper accounting standards, strengthening internal control, and making audit committees function effectively by assigning the right qualification of members thereto. It must however be realistic seen that one can never assure about the possibilities of controlling creative accounting practice in the future because of the evolving business environments. Continuous research then in accounting would still the best defence should creative accounting causes business problems for decision makers. References: Arnold, R. (2008). Economics. Cengage Learning Baumol, W. and A. Blinder (2008) Economics: Principles and Policy. Cengage Learning Bernstein, J. (1993). Financial Statement Analysis, , Sydney: IRWIN Braiotta, Jr., et al (2010). 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Principles of Auditing. London: IRWIN Read More