Conceptual Frameworks in Accounting - Essay Example

CONCEPTUAL FRAMEWORK IN ACCOUNTING ARE USELESS By Location Accounting can be defined as one of the languages of business. It acts as a communication tool towards the business and the results. Accounting is able to convey the message of the business and its performance. Accounting is a study in which classification and recording of information and analyses financial data and can be able to make decisions. Though this one definition cannot define wholly what accounting is as its users differ on what is accounting according to David Solomon’s accounting theory presents objective representation of the true reality this view has been challenged by Tinker who argues that there is a difference between the underlying real value and commodity prices. In this view, Tinker was in support that accounting is not through which a language to communicate (W Schweiker (1992) BODY Accounting theories are structures that unify a basic logic or a system of reasoning. It is through this reasoning that purely speculative and interpreting decisions that accounting users this are the key stakeholders such as the shareholders use to reach their key decisions making and further analysis is done. The accounting concepts are neither laws no rules they are opinions that have been discussed and agreed to be followed. Their origin dates back to 1971 a certification of SSAP2 which included the going concern concept, the Prudence concept, Accruals and the consistency concept. The going concern concept views a business as a continuous project with no end and it is the value of the business to break it down into bits to be easy in accounting. The first assumption is the economic entity assumption this operates under the banner that the economic activities between the business and the owner is different this does not refer to the final adjustment of many activities as owners try to use this principle to their advantage This has been used by managers by hiding a lot of cash in different countries and avoid some checks and balances in their countries (G Morgan (1982). The enticement of tax haven have made it easier for financial users to be denied the chance and They have been able to do this due to the difference in some of principles though the guidance should be based on generally accepted principle. The other assumption of accounting is the going concern which shows out this assumption provides the owner with the assumption that if the business books are reported that the business will continue for the rest of the time and works only to give a picture of a business which has no end. The monetary unit assumption holds that accountants users should translate all accounting activities within the financial statements in the sort l currency relevant to the company instead of translating according to units, of units of production or other policies. Boland, R (1989). However with very huge losses in companies over the years, the conceptual framework can be argued that it’s not relevant one of the fact why it is not is because some of the principle of accounting are too broad to be put according to the users requirement and speculation. The fact that many accountants have able to ignore this basis of accounting principles and bring huge losses to the company shows that The assumptions themselves have been used to act as weapon where the people committing the crime avoid the by using the said principles. The accountings theories are held together by the conceptual framework of accounting are formed based on assumptions and on basic rules. The historical matching principle The difference in the United Kingdom generally accepted principles with the United States also makes the conceptual framework more interesting. Under the UK, all transactional costs that relate to an acquisition a recorded as expense under post-acquisition expenses Tinker (1989). In the UK, goodwill, which is received after acquisitions, is recorded as an asset and amortization is done in a straight line while in the USA goodwill is viewed as an asset as is not amortized. The difference also applies to the dividend where in UK they are recorded under the time that they relate compared to the US where dividends are recorded to when they are declared. Valuation of properties In the US they recognize THE LIFO, FIFO and the average cost while this are not recognized in the United kingdom LIFO is unacceptable and therefore does not relate to any of the required data (Jesse 1991). Cost benefit analysis the cost involved is for decision making this involves should the cast be incurred or not. Does it hold a lot key importance than before? The benefit cost analysis framework includes specific steps to be undertaken although the financial analyst needs to do it it requires a lot more people to conduct. Identification of the needs, and also get to know the constraints and the objective function whether it is cost minimization or profit maximization. The economic metaphors according to Solomon’s believe that the economy reality is a true reflection of how we understand our financial systems. While interferences and propaganda may prevail for a short period economic reality will prevail due to the strong financial fundamentals. Thus, accounting should report underlying reality (Solomons,1986 pg 245). Philosophical realism is ambiguous and it is the role of financial users to understand and that accounting role is not to make news but to underscore the true reality of a situation. The accounting theories assume that the usefulness of the main principle is the same and this tries to ignore the basic time value of accounting. Conceptual accounting works best using assumptions. The understanding the matching principle also considers the importance of it all is due to this reason that financial instruments should be important and thoroughly analyzed to ensure they stand the test of time. The accounting information is not restricted to only one angle and brings out the dimensions of this business. This has been categorical for the fact that most of the principles are not followed to the core and it is for this reason that they have been unable to overcome this. According to Tesco where management accountants were able incorrectly overstate a profit of 264million dollars yet they blamed the issue to the closing fast of the books with the suppliers this shows that the damage had already been caused on an earlier days and it is such issues that hinder the financial sector. Though the top management quit due to this scandal it is vital to note that the financial control should not be left to the companies themselves but also to the government regulators. In 2001, Enron filed for bankruptcy this was due to a financial scandal that had been done by people inside the organization the auditor was arrested for having been found responsible for destroying information and evidence of the employees a deal had been struck by Enron inside managers which had made possible to swindle cash ( Jane (2002). The stock price for Enron fell from a record high of 90.00 to1 dollar within a single day. Though most of the managers were arrested for the crime this remains one of the largest scandal of history it leaves a lot of bad taste that most companies ignore the fact and the principles of accounting for their own needs therefore making accounting unethical if left to dishonest leaders and this for a matter of fact it also hinders a lot in the development of technology in the future of accounting (Christenson, C (2011). Banks have also had a problem in this field for example the scandal in Goldman Sachs was found to be a in a scandal in the year 2008 where some of its managers was set to be bank rolling and doing inside trading whereby they would profit the cash individually this has continued to be a big problem and this year banks were charged with inside trading and fixing the Forex markets to profit this has all happened with increased technology (Barbara (1989). Instead of the technology benefitting the world of business, it has been used to swindle and inside users of these accounting policies are the ones committing the act. Though the banks were fined 4 billion dollars, this shows that the world is not able to control the world and ensuring transparency in the world of finances. The theories of accounting have always been misused by the financiers for their benefit instead of protecting it. Tesco which has been facing stiff competition from its competitors should have concentrated in fighting for their market share yet its own employees were bringing it down and this has brought a lot of negative reaction from its investors where one of the greatest investors Warren buffet sold off his shares terming the mistake of his lifetime by buying Tesco shares in 2006. Citibank also had to be rescued from the employees who were responsible for inside trading and who instead of working for the company nearly brought it down to the extent of going under. The government had to rescue the bank for fear of taxpayers this was recorded as few individuals who were ready to bring down institution due to their greed and with the help of their systems which were not good to protect the financial fraternity. It is the requirement of the government to set up fraud departments to fight off this greed but it is important to note that preventive measures are more important than curative (Tony Puxty (eds) (1989). The reason why it is important to rescue this firms is due to the reason that the swindling of cash does not affect the organization but its ripple effect is also in the people who are shareholders and investors in such organization .It is painful for investors to lose their investments due to the few individuals in the community. Another case was about the Home Depo where the credit cards information were hacked. It is such reasons that make it a tenable to rescue this. Hewlett and placard were accused of bribery to get contracts for such scandals the company has to use its internal books to get the cash for kickbacks and corruption. Such events occur and take a lot of time to unravel and some of employees collude with the hackers. Technology has been partly to be blame as more and more financial auditors are becoming more tech savvy and part of the trade. Home Depo for example blamed their financial system for the mess that affected most to half of their customers. This was blamed to the hackers but it cannot be ignored that some of the employees were part of the game. With the 21st century and the world becoming more technologically savvy, it is important for organization to note that the world is becoming a global village and more scrutiny should be emphasized so as to ensure that transparency and accountability is enhanced. There are a lot of cases of financial fraud and to prevent this from happening the world needs to form a universally accepted fraud crime unit to ensure responsibility and actions are clearly monitored and should work to the advantage of everyone in the society. It is irresponsible to soften on the checks and balances of the organization to a few individuals. The formation of the world accounting principle was done in good faith but the users have not been honest and are fulfill their selfish interests. REFERENCES Arrington, C E and W Schweiker (1992), “The Rhetoric and Rationality of Accounting Research” ,Accounting, Organizations and Society, v 17, pp 511 - 533. Boland, R (1989), “Beyond the Objectivist and the Subjectivist: Learning to read Accounting as Text”, Accounting, Organizations and Society, v 14, pp 591 - 604. Broadbent, Jane (2002), “Critical Accounting Research: A View from England”, Critical Perspectives in Accounting, v 13, pp 433 – 449. Christenson, C (2011), “The Methodology of Positive Accounting”, The Accounting Review, v 58, pp 1 – 22. Chua, Wai Fong (1986), “ Radical Developments in Accounting Thought”, The Accounting Review, v 61, pp 601 – 632. Chua, Wai Fong (1988), “Interpretive Sociology and Management Accounting Research– A Critical Review”, Accounting, Auditing and Accountability, v 1, pp 59 - 79. Chua, Wai Fong, Tony Lowe and Tony Puxty (eds) (1989),Critical Perspectives in Management Control, Basingstoke: The Macmillan Press Ltd. Davis, S W, K Menon and G Morgan (1982), “The Images That Have Shaped Accounting Theory”,Accounting, Organizations and Society, v 7, pp 307 - 318. 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