The Importance of Accounting for Achieving Accounting in the Organization - Example

Table of Contents Introduction 2 Budgeting and Forecasting 2 Costing 5 Accountability to Shareholders 7 Important Factor in Strategic Planning 9 Conclusion 11 References 11 Introduction The paper discusses the importance of accounting for achieving accounting in the organization. It analyzes the importance of accounting in an organization at various phases. In the modern fast pace world, accounting is one field of which everyone should have some know how. In an organization, all the financial statements are prepared with the defined concept of accounting. It is the major units of monitory measurement from anything to everything in a company. It is also required for setting the benchmarking and accountability in a firm. Accounting has always played a primary factor in the evaluation of the final profit of a company. Accounting profit is considered as the ultimate profit of any company in accordance with Generally Accepted Accounting Principles taking explicit costs of doing business, interest, depreciation and taxes. Some of the researchers as well as experts have always believed that the accounting profit is the most simple as well as most comparable measure for evaluation of the performance of a company. Budgeting and Forecasting The concepts of accounting are the base of the process of budgeting and forecasting in a company. The Budget plan of a company typically outlines its financial and operational goals. It acts as a strategic action plan for the company, which helps the company in its allocation of various resources in a streamlined way, further evaluating its performance as well as formulation of different plans. Budgeting in an organization is considered as an action plan which is implemented necessarily for controlling different aspects of an operating enterprise for a defined time period. Budgets form an all-important aid in the planning process on an organization because budget planning forces the management of an organization towards thinking ahead as well as looking before the horizon. It bounds them to into certain kind of compliance measures for the benefit of the organization. Budgets are really important in an organization and failure to set and implement a proper budget along with building control procedures in an organization can negative impact. Budgets are important for the following: 1. Budgeting process in an organization reduces uncertainty in the cash-flow and operational process by allowing the key management and executives towards mapping out the future plans of the company and course of action required for the same. Failure in development and implementation of a budget can certainly lead to uncertainty position in the organization. This situation can risk an organization towards facing future challenges with confidence. 2. As budgets include cost definition and measures, they increase coordination as well as better planning among the various departments of a company as budgetary control in an organization forces management to think in a constructive manner as a group. Failure towards development of accurate budget in a company can easily result in a situation where all the different departments in the organization will tend to function in an un-planned and non-coordinated manner, which would certainly fail in an attempt towards implementation of the planning process systematically. Building an improper Budget can also lead to the risk of company’s management in the coordinating tasks of business towards various economic trends. 3. Budgets act as an important measure towards identifying weaknesses related to inefficient performance in an organization. Budgets can be benchmarks against the performance of various departments of the organization. Therefore, failure in making accurate budget can risk the company’s top brass trace key discrepancies within different activities of the operations along with taking accurate remedial measures required at that time. 4. Inaccurate and Improper Budgets within the organization can hamper the power and ability of the organization’s key management towards analyzing the expenses as well as keep them under a check, therefore preventing any waste of monitory resources in the company. 5. Failure of implementing an accurate budget in an organization can certainly lead towards the non-establishment of various performance standards related to the operational activities and can also lead to inaccurate adoption of various costing techniques. 6. Implementation of Budgets in an organization helps in identification of deviations from the pre-planned courses of action. Implementation of an accurate budget can help management forecast the numbers and it can later on analyze the reasons for the deviations and implementation of various remedial measures. 7. Budgets help an organization towards establishment of effective internal controls and standards of performance. Inaccurate budgets in an organization can give a false picture of operating performance of the company against the standards which restricts the human resource of the company towards analyzing their strengths and weaknesses. Therefore it can be argued that budgeting is an action plan in an organization that is implemented specifically to control different aspects of the operational performance of a firm for a defined period of time. Information aspect is really important for development of a sound budget in a company. Forecasts by the management, financial reports of the company and competitors and economic situation of the country and the industry forms the primary source of information for budget preparation and implementation. Managerial forecasts in an organization provide data related to the anticipated level of the activity, while financial reports helps in providing data on the financial magnitude related to past as well current operational aspects of the company. Costing Accounting is an important accountability factor for evaluating the costing and pricing of products in an organization. Many companies in the current scenario starve towards the need of focusing greater time on the improvement of quality as development of customer satisfaction strategies in their operational units. This has led to the development of the trend of Continuous Process Improvement in an organization wherein companies starve to improve their operational processes and reducing fixed and variable expenses. Continuous Process Improvement is considered as a philosophy that runs a firm in a way that every single resource of the company in encouraged towards continuously striving for serving their customers more effectively and efficiently. The costing methods that are majorly implemented by the management like target costing and activity based costing requires increased precisions in accounting as these acts as the base for the disclosure of the step by step flow of information in the company. . Target cost in accounting literature is defined as the maximum cost required for the manufacturing of the product. The process of Target Costing is usually done in regard to encourage various departments of the firm, primarily targeting design as well as production departments, for the process of evaluating as well as finding non-expensive ways for achieving superior quality of products produced. The decision of employing target costing in an organization is take after evaluation of the niches of the industry, thereby assessing the requirements of the end customers within the markets targeted. This also includes evaluation of the primary drivers of cost operating in the market, demand as well as supply elasticity in the market along with analytical relationship between costs and volumes. For an organization or for its product the target cost is usually calculated by subtraction of the expected MP (market price) from the expected/required margin on revenues of the product. As discussed above that accountability related to accounting an organization is of an utmost importance in case of costing process as if the firms tend to manipulate its sales or expenses, it would mean the company is never showing the actual costing picture to its shareholders. In the recent past, due to the increased computerization along with automation in the production areas, there have been large changes in the techniques and ways of collection as well as utilization of different informations related to the cost. In the traditional costing methods, all the costs based on the direct labor costs, were allocated to the product costs. But considering the todays scenario companies have emphasized on the separation of material costs from the other manufacturing costs. "The manufacturing costs are collected separately for individual payments and individual machines which perform a series of operations that are finally integrated to get the final product. As a strategic planning tool, Activity Based Costing (ABC) helps in understanding the effectiveness and efficiency of products" The activity based costing gives benefits to the firm some of which include, the identification of the companys activity values, different business segment etc. with the help of understanding of the costs involved as well as related dynamics in helping the attention of organization on its target customers (Ahrens & Chapman, 2007), identification of the opportunities for effectively using delivery channels for enhancing the outputs, differentiating between the activities that could be provided to different customer segments, identification of various incremental operating revenues and expenses for supporting growth, identification of opportunities in the cost management, providing information for the improvement in process efficiency. All the process used by the company in activity based costing requires step by step identification of costs per activity, which can thus increase the precision required for accounting though the firms needs to estimate these costs correctly to arrive at the correct final figures.  Accountability to Shareholders Accounting is an important factor in accountability to the shareholders. The prime example of this is Enron. The company was named in 2000 as Forbes’s best 100 companies to work for and in less than two years it declared biggest corporate bankruptcy in the American History. Cases like Enron and Anthon Anderson have always been questioning the financial reporting standards set up and the requirement if precision in accounting. Enron had engaged itself in off-balance-sheet financing, with the help of subsidiaries that it controlled to hedge its own investments. The company on its books had inflated profits and reduced its debt. The auditors of Enron, Anderson Accounting Firm had attested to the company’s financial statements, but had overlooked the unethical practices of Enron. The board of directors of the Enron had rubber-stamped the off-balance sheet deals of the company without seeing the full picture of the company as it had emerged. Even the employees of the company knew that the individual transactions that were reported by them intended to make the finances of the company looked better, but they had very less idea that such practices was widespread within the company and can lead to fall of Enron. The article also deals with the lessons to be learned from the Enron case. Finding a loophole might make legality in something but that transaction cannot necessarily be right. Many companies use complicating accounting techniques to cover up their losses or window dress their revenues and costs. Accounting certainly is considered to be a matter of highest accountability to shareholders of the company. The shareholders always intend to know the true picture of the company rather than a falsified scenario. There have been multiple cases in the past wherein companies have tried to window dress their actual situation by cooking up their accounting figures for keeping investors and shareholders aloof of what actually is happening within the company or what problems the management and the company is facing. Company these days in their while reporting their financials to the SEC have to report the effectiveness of their internal controls and procedures which is then certified by the CEO, CFO and other management of the company. Independent Auditor (accounting firm) also attests the report of the internal controls of the company. Herein a company reports whether there have been any material weakness in the internal controls or were the effective. Material weakness is a control deficiency which is caused mainly by inappropriate internal controls which didn’t allowed that error to be filtered at an early stage. Companies do their best to resolve these material weakness by setting new controls, remediating the existing controls and re-looking on the accounting and reporting methods used. This often leads to the restatements by the companies of their key financials. When a company re-files its financials or certain part of its financials with the SEC to amend of restate certain accounting figure or to correct an error in financials, it is known as a restatement. It generally results from loose accounting controls, ineffective internal controls, fraud going on within the company and an on-going SEC or attorney investigation. In such cases accountability of the company towards its shareholders is at a high risk. So keeping these things in mind it can be highly argued that accounting is a primary factor in the accountability by the company towards is stakeholders. Independent auditor of the company also plays an important factor in setting up the true picture of company among its stakeholders. This helps taking the accountability factor to the next level. They are the ones who other that internal staff and management know the operations, workings and cash flow of the company in the best way. There primary job is to audit the financials of the company in the best way. However many a times auditor lacks in doing this job which leads to a big fraud within the company. The case of Satyam Computers in India is one such primary example of this. The CEO of the company R. Raju, falsified the financials of the company for a long time before getting caught by the regulatory board (SEBI in that case). However the auditor of the company PWC never raised an issue regarding such a thing happening in the company in their reports. As a result, the company’s management was removes and it was then taken over by Tech Mahindra. Important Factor in Strategic Planning Accounting acts as an important factor in the planning process of the organization. Strategic planning is defined as the organization’s process that defines its strategies, directions and making decisions about allocating resources for pursuing the strategy, which includes its capital and people. While the appropriate timeframe of a strategic plan depends upon the type of industry in which the company is operating but still in most cases the appropriate timeframe for a strategic plan is 5 to 10 years, depending upon the industry. For e.g. in fast changing industries like internet, it would be useless for a company to develop a strategic plan for 5 years. Though accounting is the ultimate accounting factor within a company, increased precision in the accounting has become an effective need of the time, and is also regarded as the key to survival in the long run. Cases like Enron and Anthon Anderson have always been questioning the financial reporting standards set up and the requirement if precision in accounting. Many companies use complicating accounting techniques to cover up their losses or window dress their revenues and costs. Three reasons for doing strategic planning are: 1. Clearly defining the primary purpose of the organization and establishing realistic goals and objectives that are consistent with the mission in a pre defined time frame in which organization can implement the plan in full capacity. It shows way to the organization for the future. 2. It ensures the most effective utilization of the organization’s resources by focusing them towards the priorities and goals set by the strategic plan. It helps optimum utilization of labor, capital other resources which can lead it to gain a competitive position in the market. Development of strategic plan in an organization provides a base for measuring progress and performance of the organization thereby establishing a mechanism of informed change within the organization at a desired time. Benchmarking is the process of comparing an organization’s business process and performance matrices with that of best in the industry. The beat practices could be in terms of costs, time, quality, and other key performance indicators. Benchmarking helps do things in a better, faster and cheaper way. The advantages of the Benchmarking are: 1. It can enable an organization to outperform competitors by measuring efficiency of its operational matrix. 2. It helps organizations to be on a continuous improvement mode. 3. Benchmarking also helps in opening organizations mind to new ideas. Conclusion From the above discussions, it can be concluded that the accounting in general aids in the process of restoring accountability. The accounting profit is the primary profit for the company, and its stakeholders and accounting figures becomes the key to judge the performance of every company. The techniques for performance measurement, financial position, efficiency, liquidity and market value, all depends on the accounting methodologies. The concepts mentioned in the above discussions relating to accounting help the companies in restoring practices that further helps in making accountability of various companies as their prime responsibility. However this can be noted that there are numerous ways through which different accounts of companies can be manipulated and there are many companies in the past who have manipulated their books and many companies that would do in future. So the readers of the 10-Ks and financial statements of the companies, particularly their investors and other stakeholders needs to be aware of different things relating window dressing the accounts or inflating revenue or expense numbers that can really hamper their decision. The company to show the true picture to their investors needs to maintain high accounting controls. So it can be highly argued that accounting is the primary source of accountability in the organization. References Armstrong, P. (2002) ‘Management, Image and Management Accounting’ Critical Perspectives on Accounting. Bryer, R., (2002) Accounting and Control of the labour process [online] available from http://warwick.ac.uk [December 25 2010] Chwastiak, M. & Young, J. J. (2005) ‘Silences In Annual Reports,’ Critical Perspectives on Accounting. Gibson, H., C. (2008) Financial Statement Analysis. U.S.A: South-Western. 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