Conceptual Framework in Accounting is Useless - Essay Example

CONCEPTUAL FRAMEWORK IN ACCOUNTING IS USELESS By Location Conceptual framework in accounting is useless Introduction A conceptual framework is a financial accounting theory that is prepared a body of standard-setting whose main purpose is to carry out objective testing on practical problems. A conceptual framework is used when there are important issues of financial reporting such as objectives of financial statements. Conceptual framework has some benefits on financial reporting such as establishing precise explanations that facilitate accounting issues’ discussion, providing accounting standard setters with guidance when reviewing and developing financial reports and many others. However, there many critics who argue that the use of the conceptual framework in accounting is useless. The aim of this paper is to critically explain why many people think that the use of the conceptual framework in accounting is useless. Conceptual framework in accounting has received a lot of criticism whereby most of its critics claim that the framework does not provide adequate basis for setting standards. The Financial Accounting Standards Board (FASB) has proved this inadequacy, which is becoming a more rule-based approach. Nevertheless, there is empirical prove that has been collected to support this argument against accounting conceptual framework (Hines 2011, p. 45). Out of the five characteristics of accounting conceptual framework, most people only rely on one characteristics, reliability, on accounting statements to make financial decisions. In addition, accounting familiarity influences many people to rely on or use financial statements instead of finding other accurate ways for finding this information. Therefore, it is not only that accounting conceptual framework needs alterations, but also changes to help come up with accounting standards that are principles-based. Implementing principles-based standards means that many users will be able to use irrespective of their backgrounds. Many people have been criticized FASB for not advising organizations to give out information that is useful and interpretable to the users of financial statements. Its conceptual framework is the main source of all accounting standards (Hines 2011, p. 78). Therefore, the conceptual framework for accounting must exemplify several qualitative characteristics in order to ensure that the financial reporting is able to provide financial statement users with information that is adequate for decision making. The accounting conceptual framework of the United States was founded in the year 1980. There are five key characteristics of accounting information, which a conceptual framework must comply with in order for it to be an effective application. These qualitative characteristics include relevance, consistency, understandability, comparability, and reliability. In most cases, financial information that is derived from conceptual framework is usually prospective in nature or current meaning that it has be upto date and relevant. Therefore, due to the use of accounting conceptual framework, financial statement users cannot get accounting information that increases the main characteristics, which are relevancy and reliability. This is because it is difficult to produce a verifiable information using accounting conceptual framework than applying any other framework (Bendrey, Roger Colston 2003, P. 45). However, most studies conclude that, accounting conceptual framework is unable to produce financial information that is reliable and relevant. Moreover, another reason why the use of conceptual framework in accounting is useless is that the information produced is difficult for financial statement users to understand because the financial terms used. It seems that the use rule-based framework has highly contributed to the lack of the above mentioned characteristics in financial statement hence influencing its ineffectiveness. Accounting conceptual framework is useless because, the accounting standards are so technical such that many readers of financial statements are unable to understand the key objective and goals of every financial statement element (Hines 2009, p. 37). This is challenging for many accountants because it contradicts the main goal of accounting, which is providing useful financial information which is used for decision making. Financial information should always be useful to everyone who wants to use rather than being essential to only those who understand it. In addition, there are no circumstances that accounting information should only be advantageous to the experts in the accounting field. Accounting information should be a tool instead of being a barrier to the users because the information contained in them is supposed to be of benefit to them. Therefore, the information contained in financial statements should be easily understandable to a layman. Nowadays, the field of accounting profession is contending with a critical problem, which is identified as the need for a more advanced conceptual framework in accounting. This conceptual framework has been developed for many years. However, there is a need for financial professionals to make some amendments to the current conceptual framework because the accounting field is experiencing changing conditions every now and then (Bendrey, Roger Colston 2003, P. 56). Many financial professionals have been continually overlooking the implementation of conceptual framework in accounting claiming that its use is meaningless. According to many accountants, the project of conceptual framework in accounting is difficult to understand and use because the subject is an abstract and accounting professionals are used to handling specific problems. In the process of solving such problems, many accountants rely on their own types of conceptual frameworks (Hines 2009, p. 56). Many people argue that if the use of conceptual framework in accounting makes sense and provides relevant information with the users being able to understand its concept fully, then the confidence of users to use financial statements effectively will be improved. View people support the establishment of conceptual framework in their accounting system claiming that it is useless because of the difficulties they face while trying to understand the financial statements. Financial statements created using accounting conceptual framework is sometimes susceptible to errors and fraud, which as a result undermines the overall reliability and credibility of the produced information. The use of conceptual framework has been highly criticized due to lack of reliability and credibility in financial statements. In order for the framework to be effectively useful in accounting, the information produced should comprise all the above characteristics. In addition, reliability of financial statements depends on its production cost (Lamberton 2005, p. 7). There are times when the cost of producing financial information using conceptual framework sometimes outweighs the entire benefit that the users expect to gain and this explains why accounting conceptual framework is sometimes termed as useless. Also as a result, the quality of the financial information can be compromised. The use of conceptual framework in accounting is also regarded as useless due to its disadvantages. Conceptual framework has several disadvantages. To begin with, the framework is based on principles and nature and this is always challenging when producing accounting statements.The contents of the standards of conceptual framework sometimes conflict with the standards of other boards. Despite the strengths of AAA, there has not been a true conceptual framework where standards can be based. In the year 1939, the AICPA formed the CAP (Committee on Accounting Procedure) as the main body for setting up financial standards. Committee on Accounting Procedure was later replaced with Accounting Principles Board (APB) in the year 1959 as the main authority for setting accounting standards. The failure of CAP was as a result of it being unable to achieve the instructions of SEC to minimize the accounting alternatives through a challenge-by-challenge approach to setting standard. This problems to a broad extent lead to lack of organization in accounting standards since APB lacked basis for conclusions they made on every standard. The current conceptual framework has needs some changes for its use to be of great importance (Bryer 2009, p. 559).Economists point out that in order for an accounting information to be useful, there are some various qualitative qualities it should have that were mention earlier in this essay. These qualities are categorized as either decision-specific or user-specific qualities. The general user-specific qualities of financial information is that the information should be clearly understandable by the users. For this reason, accounting conceptual framework is broadly criticized due to failure of achieving these characteristics (Lamberton 2005, p. 13). Currently, many users are blaming the accounting conceptual framework because the accounting standards have become rule-based and this causes structuring of financial transactions. In fact, it is broadly argued that the use of accounting conceptual framework is inadequate for modern accounting standards. In addition, an accounting conceptual outline that is reliable with the current principle based accounting system is required by accountants to not only serve as standard setting guideposts, but also, for the highly needed domestic and global accounting standards’ convergence. This is because without implementation of a principle-based financial standards, FASB will be required to force some fitness between the standards and the conceptual framework which is a bit challenging thus the reason why it is claimed to be useless in accounting field (Hines 2009, p. 67). Addition, with the use of accounting conceptual framework, many practitioners end up making use of their judgments to define the appropriate accounting rule to be applied rather than making use of these judgments to come up with a more quality theoretical financial application. Therefore, the use of accounting conceptual framework seems to have brought many challenges and problems to all parties involved, thus being claimed as useless. Even if the accounting conceptual framework is highly being argued against by a large group of users, there is still no clear evidence to support this claims. However, this essay has tried to highlight the major reasons why many claim that the accounting conceptual framework is useless. This paper has tried to discuss how the use of conceptual framework in accounting has contributed to lack of reliance on accounting statements. There is need to examine the accounting conceptual framework from the perspective of users because the main purpose of accounting statements is over useful information to users for the purpose of decision making. In addition, there is also need to focus the entire examination on the qualitative qualities of financial information because these are the accounting standards’ backbone. Conclusion Although great effort is still made to shape up the accounting conceptual framework, there are still many who claim the use of the accounting conceptual framework has many negative effects and is useless. In order to ensure that conceptual framework is welcomed by many, there is need to make thorough changes to the current framework for it to meet the goals of financial statements and information. Conceptual framework in accounting has received a lot of criticism whereby most of its critics claim that the framework does not provide adequate basis for setting standards. This essay concludes by asserting that the accounting professions should major in making alterations to the current conceptual framework for it to suit and meet all the accounting goals. Bibliography Bendrey, M, Roger H, and Colston W 2003,Essentials of Management Accounting in Business London: Continuum. 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