Is Accounting the Most Effective Means to Achieve Company's Accountability - Term Paper Example

IS ACCOUNTING THE MOST EFFECTIVE MEANS OF ACHIEVING ACCOUNTABILITY IN ORGANIZATIONS 0 Introduction With the increasing internalisation and expansion of businesses and organisations, their impact on the society and individuals is also increasing. To save the interest of the shareholders, investors, public and society, organisations have been made accountable for their actions. Humanitarian Accountability Partnership has defined accountability as a process through which the people, companies and states consider their decisions and actions, report upon and clarify their decisions and actions and report the issues arising from the decisions and actions. Different mechanisms have been adopted to ensure the accountability of the organisations however, accounting is considered as the most effective means of achieving accountability in organisations. In this report, the concept of accountability has been presented and a few mechanisms of accountability have been also discussed. Moreover, the role of accounting in accountability has been analysed and finally, the limitations of accounting have been discussed. 2.0 Accountability The process through which the organisations acknowledge, assume responsibility for and being transparent about the influence of the policies, actions, decision and performance (Accountability, 2008). Robert and Scapens (1985 cited by University of Leicester, 2009) have defined accountability as the process of giving and demanding of motives for conduct. Most of the organizations have developed their own definitions of accountability to show its importance in their actions. The term ‘accountability’ as defined by World Bank (2008) is the obligation of power-holders to accept and take the responsibility for the actions they perform such as government officials, international financial institutions, and private corporate and civil society organisations. To develop a strong conception of accountability, introducing well-defined mechanisms of accountability is very important (Marmor, 1983, pp.85). Organisations are highly focusing on corporate governance to ensure accountability. Parkinson (1994, cited in Solomon, 2007, pp.13) defined corporate governance is the supervision and control developed to confirm that the management of company acts in accordance with the shareholders’ interests. Since accountability is associated with the actions of the individuals in the organisations therefore, companies are significantly relying on human resource management systems. Accountability, in the context of human resource management, is the extent to which the behaviour of an individual is observed and determined by others, with important incentives and punishments being dependent upon those evaluations (Ferris, Rosen & Barnum, 1995, pp.187). The American Management Association give HR awards to the professions who exhibit excellent performance throughout the year such as in 1994, the policy manager of IBM, Thomas DuPree achieved the award (Philips, 1996, pp.12). Based on the causes, consequences and discussion of Ferris, Rosen & Barnum on accountable human resource management system, I have identified different mechanisms through which human resource management system ensures accountability in organisations (1995, pp.190-191). The first mechanism is the organisational structure of the companies which can increase or decrease the accountability. For example, in the traditional and hierarchical structures, the accountability is greater as compared to accountability in modern and complex structures like matrix structures. Second, the policy descriptions of organisations highlight how the individuals are expected to behave and describe the values and ethics. Third, the increasing dynamism in business environment and concerns on transnational and trans-cultural issues has insisted the organisations to develop the culture of accountability. Fourth, in the large companies, risk-taking is considered as a highly valued entrepreneurial skill, which increases the observance and conventionality to organisational expectations. Fifth, the organizations are more focusing team work rather than individual tasks to increase the accountability of individuals. Sixth, performance appraisals, predefined tasks, matching performance etc are some other human resource management tools to ensure accountability of organisations. The following diagram presents the example of HRM Accountability. The diagram shows that first goals are establish in HRM and measures are defined and then measures for accountability are defined through which performance is measured, evaluated and reported. Figure: HRM Accountability Source: United States Office of Personal Management and Office of Merit Systems Oversight and Effectiveness, 1998 The organisations cannot completely rely on human resource management systems to ensure accountability. The human resource management systems are more based on qualitative and subjective measures and they are more suitable to ensure the accountability of individuals within organisations. Another mechanism of accountability is the set of accounting methodologies and practices. In the following sections, it will be evaluated whether accounting appears to be the most effective way to achieve accountability in the organisations or not. 3.0 Accounting Accounting can be defined as process which offers information of financial nature to the interested people for the sake of making decisions about a business entity (Mills, Call & Drew, 2000, pp.2). Accounting, as defined by the American Institute of Certified Public Accountants, is the art of measuring, classifying and describing the financial transactions in an organised manner and in monetary terms (Vij, 2004). In consideration to the effectiveness of accounting methods in ensuring the accountability in organisations, the authoritative body, the Financial Accounting Standards Board (FASB) has been created. This authoritative body is responsible to develop accounting principles which are published publically. These principles help the organisations to understand what to report and how to report. The international financial bodies like FASB provides the standard accounting policies, laws and methodologies based on which the companies report their financial transactions and events. The standardisation has been created for all kind of transactions from costing inventory to reporting profit in the financial reports. These standards have created uniformity in the reporting styles of organisations which help the users of the financial statement to use information in a more effective and also help the organisations to understand what to report and how to report. Managerial accounting provides the data to the managers which help them in running day-to-day operations and in managing future operations. The information is not only used for the decision-making purpose but it also helps the managers to keep a track and record of day-to-day transactions (Warren & Reeve, 2006, pp.9). The accounting methods and processes used in managerial accounting have been introduced to ensure accountability within organisation. Another field of accounting is financial accounting which involves the process of recording and reporting of economic data and transactions of business (Warren & Reeve, 2006, pp.8). This information is shared with the stakeholders of the company such as creditors, government agencies, employees and public. In this way, the accounting methods and processes used in financial accounting have been introduced so that companies can ensure their accountability and responsibility in front of their stakeholders. In addition, there are various other fields of accounting which are helping organisations to maintain and fulfil their accountability needs. Various accounting concepts and processes related to different fields are being used to ensure accountability in the organisations. Financial statements were introduced to ensure whether the large amounts of money needed for Industrial revolution was properly accounted for or not. According to Young (2006), the principal rationale of financial statements is to offer useful information to the investors and creditors to make economic decisions. Since organisations are accountable for their actions to the investors, creditors, government agencies and public therefore, information available in the financial reports is sufficient to report the actions of organisations. Moreover, by publishing the financial reports, organisations further increase the access of users to the company’s information. 4.0 Accounting for Accountability Accounting as a Legal Requirement: To make accounting as legal basis for accountability, the Companies Acts have been introduced. Before the introduction of the Companies Acts 1981, the companies were supposed to present a “true and fair” view of their company under the general rules and scope of accounting however, after the incorporation of 1981 and 1991 Companies Acts, the companies started reporting their financial performance in accordance with accounting standards (White & Hollingsworth, 1999, pp.18). Standardisation of Accounting: As mentioned earlier, financial statements provide the best way to companies to report their quarterly, half yearly and annual performance. Young (2006) argues that accountants have always been urging for the creation of accounting objectives so that the uniformity of these statements could be increased. Therefore, accounting has always been connected to the users of financial statements. This connection has been opposed by the critiques who believe that accounting cannot ensure accountability because the users of financial statements are diverse, inconsistent, conflicting and uneducated. When FASB introduced accounting standards, it constructed the image of financial statement users as ‘rational economic decision makers’ (Young, 2006). Today, the clearly described accounting objectives and accounting standard setting have enhanced the economic disclosure and corporate choices are being made based on available accounting information. The idea is that standard accounting practices have not only increased the transparency of the organisations but they have also helped the users of the accounting information to ensure the accountability of organisations. Accounting as a Way to Communicate: Roberts and Scapens (1985) explain that the concepts and methods of accounting institutionalise the notion of accountability and it gives the right of some people to others to hold them accountable for their actions. The accounting practices involve the communication of values and expected behaviour about what is approved and what is not and what has happened or what should happen. For example, budgeting is an accounting process through which companies get to know what has happened and what should have happened. Accountability through Accounting in Practice: Ezzamel (2004) describes the effectiveness of the accounting in an organisation by giving the example of Britech. In Britech, the new initiatives were taken by the new managers and accountants by changing the segmental reporting, benchmarking targets and working capital allocations. The new methods like NPV, EFQM, EVM and EVA, quality enhancement matrices and revenues matrices were used. The new accounting methods were not only used rather their use was further extended such as rather than tracking time in the form of man hours, more emphasis was given in ensuring the efficient use of time and inventory and man hours were linked to NPV. The new methods were more detailed and resulted in a better financial performance and revised the power relations within the organisation. Therefore, the new accounting methods improved the efficiency of the company to better represent their performance to their stakeholders. Accounting Practices and Accountability: Many researchers have focused on specific accounting methodologies and studied their impact on the accountability and control within organisations. In 2006, Bayer conducted a research on labour process theory and based on the findings of his research, he argues that the most significant mechanism in an organisation for control is the accounting because it gives the senior managers the objectives measures of the generation and comprehension of surplus value. These measure objectives keep the labour accountable for their work and the circulation of capital. Bayer’s opinion suggests that accounting plays a very important role in the control process of the labour. Because of the effectiveness of the accounting practices and methodologies, the dependence of organisations on these practices is increasing. The large organisations are moving towards electronic records retention systems. Although only 10 to 15 large U.S. corporations are using the electronic records retention systems (Mearian, 2009) however, their huge investments in such systems show their usefulness. It is also argued that these systems can ensure the enforcement of laws like Sarbanes Oxley Act. Accountability through Accounting in Practice: Another example which shows how accounting can enhance the accountability has been described below. United States has spent more than $55 billion on the building and construction and development projects of Afghanistan. However, according to the recent audit conducted by Special Inspector General for Afghanistan Reconstruction, there is no way to determine whether the money has been consumed for the right purpose or not. Two reasons have been presented for the lack of accountability for these funds. The first reason is that the state government is not asking for accountability for outgoing funds from the United States companies which are also less interested to disclose the information. Second, the Afghan companies have limited and minimal accounting capabilities because of which a massive misappropriation of funds have been observed (Francis, 2010). Accounting is so effective in accountability of organisations that sometimes they made the organisations to incur significant losses such as deterioration of their image for example, the recent TUI accounting errors. TUI is a huge travel group and its directors have been recently stripped of their annual bonuses because of the accounting errors they made. Because of the accounting errors made by the directors, the company was forced to restate its accounts by $117 million last year which did might have deteriorated the accountability image of the company (Russell, 2011). As a penalty the company has decided that directors will not be given bonuses this year. The idea is that accounting portrays the real and true picture of the company in the market, which gives a fair chance to all organisations to compete in the ever-growing competition. 5.0 Limitation of Accounting Misleading Accounting Information: Morrison (1952) argues that the financial statements of the company cannot reflect the economic condition of an organisation and it only provides information to the analyst based on which he can make conclusions about the enterprise. Morrison argues that failures of many companies to ensure their accountability is an evidence of the fact that certain economic factors cannot be subjected to generally acceptable accounting principles. The failure of Enron, Tyco, Xerox and WorldCom show the limitations of accounting. When the large organisations mislead the investors the questions are raised. Simplified Accounting Representations: Armstrong (2002) argues that the accounting practices provide the simplified representations to the managers based on which they can make their decisions such as the activity-based accounting. According to Armstrong, the simplified representations of accounting has led to the dysfunctional management control and disassociated the managers from their expertise. The point-of-view of Armstrong suggests that rather than making managers more efficient towards their roles, accounting has reduced their efforts to put their expertise and skills. False Image of Company: On the other hand, some researchers have specifically described the accounting methodologies and their limitations. Chwastiak and Young (2003) argue that annual reports of the corporations are usually filled with the accounts, which provide the details of the strategic actions taken by the organisations like acquisition downsizing, technological developments, changes in the market share and changes in cost components. These annual accounts are supported by the strategies like profitability of the company regardless of the consequences on such steps on the environment. Therefore, negative consequences of the actions of the corporations are seldom discussed in the financial statements which show the least concern of these organisations for social consequences. Since all organisations are accountable for their actions and their impact on the environment and society therefore, accounting does not cover this aspect of accountability. Self-Regulation of Organisations: The concept of liberal-accountability overlaps with the free-market reforms promoted by the limited governments and gives drive to deregulation and privatisations reflected in the activity-based accounting, balance score card, total quality management and total quality management to ensure the efficient practices in management. These international accounting methods promote a culture of calculation and control however, it ignore the national value systems that might be better able to manage human communities (Lehman, 2005). Lehman argues that large organisations develop accounting policies as a process of self-regulation and the significant accounting framework is based on a regime framework which supports the private organisations as the most efficient motors in deriving the social change and makes accounting a fiction which is something to suggest than to effect. Failure Enron and Accounting Practices: Solomon (2007) has described the case of Enron as a biggest collapse of accounting. Solomon argues that collapse of Enron has presented the negative aspects of accounting and auditing profession in the United States and worldwide. The fake accounting practices of the company were not transparent and in 2001, the fraudulent practices of the accounts of the company emerged on the screen. Enron recorded a profit as a result of joint venture with Blockbuster Video which never materialised. The company restated its accounts in 2002 which reduced the profits of the company by $600 million however; cumulative profit declined by $591 million and enhanced the debt of $628 million for the annual reports 1997-2000. The Securities and Exchange Commission investigated the auditing work of Enron’s auditor, Anderson. The company attributed the earlier omission of three-off balance sheet entries for the difference between the profit and because of profit inflation, company ended up with high earning per share (EPS). The increase in EPS also pressurised the other USA firms and created corporate short-termism. Enron manipulated the accounting numbers and figures by inflating EPS and by removing the liabilities presented a better image of its financial statements. The fall of Enron has a appeared as a major corporate fall in the history and it also highlighted how the auditors can manipulate the accounting figures and organisation shows unethical behaviour. Increasing Globalised Businesses: To reduce the limitations of accounting various accounting reforms have been introduced such as Transparency Act if 2002 which is also known as Sarbanes-Oxley Act. However, the recent Wall Street crisis shows the weakness of such accounting reforms. Actually, keeping a check on organisations whether they follow the laws properly or not, in increasing-globalised world, appears another major challenge for international financial institutions. 6.0 Conclusion Based on the above discussion it can be concluded that all organisations are accountable for their actions, which can impact the individuals and the society. Various mechanisms have been developed to enhance the accountability of organisations such as corporate governance, efficient human resource management systems and accounting practices like financial statements and reporting. The analysis shows that unlike other mechanisms of accountability, accounting is relatively an effective tool to ensure accountability of organisations. The standard accounting methods and practices have provided a uniform way to organisations to report their transactions and events and have also helped the users of the information how to interpret the information with sufficient knowledge of accounting methodologies. Although accounting can be considered as the most efficient tool to ensure the accountability of the organisations however, its level of effectiveness can be increased if the organisations employ other mechanisms of accountability in parallel. The limitations of accounting such as manipulation of figures because of various reasons are evident from the failures of companies like Enron. Moreover, these are not only the accounting laws and methodologies which can ensure accountability but how these methodologies are used, can also play a significant role. Therefore, accounting practices and methodologies provide the efficient means of ensuring the accountability of organisations however, more accounting reforms are required with other mechanisms of accountability to make accountability more transparent and reliable. Bibliography Accountability, 2008. AA1000 Accountability Principles Standard 2008. [Online] Available at: http://www.accountability.org/images/content/0/7/074/AA1000APS%202008.pdf [Accessed on 03 January 2011] Armstrong, P., 2002. Management, Image and Management Accounting. Critical Perspectives on Accounting, 13, 281–295 Bryer, R., 2006. Accounting and control of the labour process, Critical Perspectives on Accounting, 17 (5), 551–598 Chwastiak, M., and Young, J. J., 2003. Silences in Annual Reports. Critical Perspectives of Accounting. 14, 533-552 Ezzamel, M., Lilley, S. and Willmott, H., 2004. 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