The Ways and the Faithfulness in Which Accounting Represents the World - Literature review Example

Why Is The Way In Which Accounting Represents The World The Of Much Controversy And Debate? To What Extent, If At All, This Controversy And Debate Justified? Table of Contents Introduction 3 The Reasons, the Ways and the Faithfulness in Which Accounting Represents the World 4 Limitations of Accounting Representations 5 Requirements of Accounting Representations and the Ways to get it 8 Meaning of Social Accounting 11 Evaluation 13 Conclusion 15 References 16 Bibliography 22 Introduction Accounting is considered as a systematic approach through which a company records its financial information. Through this method, a company intends to develop certain statements or reports which are further reviewed to analyse its overall financial transactions and strategic operations (Alves & Antunes, 2011). In this similar context, accounting information aims to reveal both past monetary transactions as well as present conditions of accounting operations conducted by the organization. Thus, emphasising on the criticality of accounting approaches, in order to enhance the quality of the financial statements, national as well as international organisations, have often been identified to have jointly established a conceptual framework which includes certain qualitative attributes. The incorporations of such regulatory boards have been principally concentrated towards developing an improved theoretical framework on the basis of ‘objectives-oriented’ standards (IFRS Foundation, 2013). Based on a similar concern, this paper intends to discuss the debates and the controversies that have emerged over the past years regarding accounting practices and the way this particular doctrine represents the world. With this intention, certain noteworthy arguments have also been taken into account to make adequate justifications of these debates. The Reasons, the Ways and the Faithfulness in Which Accounting Represents the World The term, ‘accounting’, has been regarded as a managerial doctrine which is fundamentally used to record the financial transactions performed by the organisation and also to quantify its strategic position within the industry. The significance of accounting process today is undoubtedly inevitable not only from industrial perspectives but also from socio-economic concerns. However, based on the scepticism that accounting statements may misrepresent the actual transaction values of the company making fictional and unethical judgements, various regulatory bodies in the national as well as in the international periphery have intended to control the practices among organisations through specified regulations (Mills et. al.,1996). In this context it can be stated that accounting represents the world in various ways such as providing quantitative statements based upon the business performances through which managers can develop control measures to manage the monetary transactions of the business to calculate the fair value and prepare budgets rendering transparent judgements. In this similar context, it has been observed that accountant professionals need to actively participate in accounting representation process to ensure that organisations are steered and managed on the basis of reliable and just representation of the financial information. In order to represent the faithfulness of accountancy, professionals should also follow ethical concerns while preparing financial reports for the organisation and its stakeholders. Contextually, accounting ethics can be regarded as a crucial aspect in accounting representations. In past few decades, the significance of accounting ethics has increased considerably to ensure appropriate outcomes of businesses and also to secure the interests of the social and economic participants which tend to impose significance influences on the overall business functionalities in the modern day context. There are several codes of conducts that accountants should recognise in order to meet the highest standard of professionalism and thus satisfy the public interests by attaining superior quality standard in accounting representations. In order to satisfy the needs of the world, majority of the accountants follow four basic principles while preparing financial statements. These principles are termed as credibility, professionalism, service quality and confidence (Usurelu & et. al., 2010). Contextually, with due consideration to these responsibilities of accounting professional in representing financial information, Institute of Chartered Accountants in England and Wales (ICEAW) established certain principles for maintaining and delivering superior standard of practices. In the developed principles, the viewpoints of public confidence have also been argued to play a major role when establishing accurate accounting representation. In order to preserve faithfulness in accounting representation the ICEAW implement and follow five ethical principles i.e. integrity, professional competence, objectivity, privacy and professional judgement. The ICEAW also attempts to follow an ‘ethics-based approach’ in order to enhance the values and quality that accountants should exemplify while developing financial reports for the business firms preserving faithful representation (Kaplan Financial Limited, 2012). Limitations of Accounting Representations Accountancy helps managers to assess the financial statements and review the actual industrial position of the company revealing its performance over a given period of time in a quantitative manner. The information obtained through accounting highly effective strategic decisions through which they can ensure smooth functioning of the company in the short-run as well as in the long-run (Uşurelu & et. al., 2010). However, it has often been argued by professionals that accounting does not represent every dimension of organisational performance. These particular limitations have further revealed new directions regarding the utilization of various accounting elements. It is worth mentioning in this context that most of these limitations are the consequences of the unique characteristics possessed by this doctrine. Contextually, few of the aspects which accounting does not represent are described below: Accounting is historical in nature Accounting practices principally depend on historical data and thus lacks in reflecting the current financial position of a business. From a critical perspective, it can further be stated that as accounting principally represents the past financial performances of a company to perform future planning and other managerial decisions, it lacks in representing the probable changes in its internal as well as external environmental elements that might cause significant impacts on its forecasted financial dealings. Moreover, even though accounting reveals the profitability of a business, it lacks in representing the weaknesses and the strengths that the company possesses which have contributed to its profitability (Ireland, 2005). Absence of full disclosure of facts Another major limitation of accounting representation can be identified in terms of its sole concern towards revealing the monetary transactions performed by the company over a given periods of time which is principally based upon quantitative attributes. Thus, accounting does not represent qualitative elements such as managerial efforts, employee morale, brand reputation and quality attributes among others. Additionally, there are many other facts which are non-monetary in nature such as market demands of organizational products, working culture and relationship among workers and the management which are learnt to impose significant effects on the financial performances of the company but are not represented in the accounting process while preparing financial statements (Ireland, 2005). Professional Judgment Facts which are recorded in financial statements through accounting practices are often debated to be influenced by the personal judgment of accountants by a significant extent. For instance, methods for calculating depreciation, stock valuation and provision of doubtful debts are only determined by the accountants, which might not represent accurate and fair value of the business. All these aforementioned calculation procedures might vary according to the business conditions which can further reveal inappropriate justifications or rather misrepresentations of the current business situation. It is in this context that the utilization of professional judgments, considered by the accountants while preparing financial statements, should be consistent according to the economic reality of the external business environment which again develops a significant gap between the information represented through the accounting and the actual performance of the company (Ireland, 2005). Financial Reports Are Always Considered As Interim Report of Business Financial statements which are developed by the accountants are always considered as an interim report of overall business operations owing to which it has often been argued that profitability and accounting representations are not fully reliable as well as relevant. It is in this context that all transactions which are represented through financial statements do not represent the cost of assets and liabilities which are continuously changing due to the inflationary rate fluctuations and other elemental changes of market components. Therefore, accounting does not record the transactions according to the inflationary rate changes or economic fluctuations in the market and thus can be argued to depict inappropriate business position (Ireland, 2005). No provision of cost control Accounting does not assist business organizations in controlling the costs representing its strategic performances. Contextually, professionals and critics have often argued that in financial statements, accountants principally consider the costs which are already incurred by the organisation in accordance with its past performances. To be specific, accounting representations act as an assessment tool for the organisations rather than operating as a strategic management tool to suggest control measures to the professionals engaged with decision making (Ireland, 2005). Requirements of Accounting Representations and the Ways to get it From a critical perspective it is worth mentioning that financial statements or accounting practices of a company should represent integrity in the reporting standards and all other needful information which can be beneficial in the strategic decision making of the company. It is in this context that the sole intention of accounting representations is to render actual data concerning the business position of a company and assisting the stakeholders as well as the decision makers to develop effective and accurate strategic measure to cope with the external environmental challenges. Thus, accounting practices should represent its societal responsibilities through integrity and completeness. With this intention, accounting practices are often suggested to be democratised allowing a wider involvement of citizens or rather the stakeholders that can in turn ensure integrity, reliability and faithfulness in the accounting representations (McCarthy & et. al., 2011). It is in this context that in order to identify societal accounting practices it is necessary to understand the democratic credentials of strategic cross-sectional partnership. Contextually, an inclusive democratic audit of partnership might imply detailed evaluation of individual perceptions regarding accounting practices. The subjective matter of accountability in this context can widely vary where it can be considered in terms of the depiction of ethical behaviour, social esteem, and functional interdependence among others. Moreover, there is a wide range of acknowledgment regarding the requirement of creative accounting promoting democracy and facilitating more participatory forms of social accounting practices (Brown & Frame, 2005). From a philosophical perspective, accounting representation is considered as societal practices where democratization power should be exercised. Again, from authoritative perspectives, accounting practices inscribe its values on the basis of real life evidences. Moreover, accounting representations have also been found to create strong influences upon economic viewpoints, social exchanges and the arbitration of conflicts within the decision makers in a company which can again create significant impacts on the stakeholders. It is in this context that appreciation power of accounting practices for restructuring social realities has often been addressed deciphering substantial interest in reconfiguring calculative knowledge (Meadowcroft, n.d.). In the present business context, a prevalent recognition regarding internal as well as external accounting discipline can be observed which significantly addresses the needs of creative accounting practices which facilitate participatory forms of decision-making within the organisational context. Moreover, the concept of creative accounting, which is often referred as ‘new accounting’, is often criticised to be highly based on the utilization of ‘technocratic decision-making’ tools which are entrenched on the basis of ‘positivism’ and ‘neo-classical’ economics thus limiting the democratisation of the accounting representations and creating dissatisfaction among the wide-ranging users of such information. Additionally, due to the utilization of cost-benefit analysis and similar other techniques, debates have been raised among the accounting professionals addressing the greater chances of misrepresentation in creative accounting. On the basis of these criticisms, it becomes particularly evident that the social as well as environmental aspects of accounting are considered as tools that identify the pluralist nature of contemporary liberal of democratic societies. Correspondingly, in order to assist professional in representing the aspects which should be addressed through financial statements, since the past few years, several social accounting tools have been developed in order to promote democratic dialogue within the accounting practices of the company. At present these tools are incorporated in order to promote explicit ‘dialogic accounting technologies’. However, followers and creditors of traditional accounting practices and representation techniques have criticised social as well as environmental accounting as under-theorized and unsatisfactorily politicised (Jack & Lagunoff, 2006). It is also arguable in this regard that from system-based viewpoints, a company is considered as a part of wider social system. Again, majority of the leading business entities are assessed as strongly influenced by the societal changes within which it operates. Thus, in order to ensure smoother business operations, it is the responsibility of a company to consider the expectations of individual users of accounting information. These users can be employees, customers, suppliers, regulators, capital providers and other stakeholders belonging to the external business environment of the company. In this regard, stakeholders’ as well as shareholders’ require reliable and informative accounting representations in order to make appropriate decisions (Ezzamel & et. al. 1994). Moreover, company’s financial accounting policy making procedures should also be represented through accounting as these data are termed to be quite significant not only for organisational managers but also for stakeholders who tend to utilize financial accounting information. However, from a contradictory perspective, it can also be argued that the choice of policy can also be criticised as a way through which companies can tend to manipulate stakeholder’s perceptions regarding the overall financial operations rendering unfaithful representation of the accounting information. Therefore, accounting should also represent the legal specification mentioned by the concerned regulatory board when conveying financial information regarding a company’s transactions. This will not only minimise the tendency of professionals to misrepresent the accounting information but also enhance the scope for accounting democratisation and wider constituency of its stakeholders (Carrillo, 2007; Rudzioniene, 2006). Meaning of Social Accounting Social accounting is considered as a direction of recognising the effectiveness of an organisation in attaining its objectives and values taking into account the interests of the company’s stakeholders and shareholders. Theoretically, it has often been argued that with the help of social accounting, organisations can identify the improvement areas required to be revitalised through facilitating the successful accomplishment of its pre-determined objectives and goals. Presently, the notion of social accounting has been regarded as increasingly significant referring it to be one of the foundations of accounting good practices in Corporate Social Responsibilities (CSR) possessed by organisations (Pay, 2013). When assessing the implications of social accounting, Young (2006) revealed that the users of financial statements are apparently associated with the process of setting standards and procedures of accounting practices within an organisation. Thus, it can be regarded as quite vital to construct accounting practices rendering due consideration towards the social responsibilities and ethical viewpoints concerning the interests of the users of accounting information (Young, 2006). Social accounting practices can be utilised while delivering information to the investors or shareholders by emphasising on the outcomes of the proposed projects and also regarding the already obtain results from the implementation of the previous strategic initiatives. Moreover, through social accounting technique, companies can obtain information regarding its ongoing financial transactions which shall facilitate it in better strategic decision making and overall efficiency development. Social accounting is also regarded to be a way of representing the extent through which an organisation attains its objectives rendering due consideration towards its social as well as ethical obligations (CBS Network, 2013). In this similar context, Lehman (2005) affirmed that the globalisation process in the current day context play a vital role in creating significant impacts upon the sovereignty of national states and accounting representations. Lehman (2005) further defined ‘accounting’ as a discipline which represents the way society incorporates with the networks followed in organisational accounting systems. In terms of social accounting, it has been observed that community members play an imperative role to assist organisations in developing appropriate financial decisions for its future improvements (Lehman, 2005). Theoretically, the concept ‘Social Accounting’ is also known as ‘Social Audit’ which refers to specific facets of accounting representation in terms of its social and economic interests being recently bestowed with the title ‘Social and Ethical Accounting, Auditing and Reporting (SEAAR)’ in the UK. Since then the conceptual framework has been utilised or rather practiced on the basis of three levels, i.e. accounting, auditing and reporting. In order to promote the virtues of social accounting and to generate greater awareness regarding the essentiality of accounting representations, various regulatory bodies and organisations have been established in the UK. The Institute of Social and Ethical Accountability (ISEA) was founded in the year 1996 in the UK which follows and utilises social accounting practices to a large extent. ISEA is a global professional group committed to reinforce social responsibilities as well as ethical practices within business environment of the national organizations. Moreover, ISEA tends to make attempts in order to promote superior practices regarding the three levels of SEEAR and develop certain standards for the professionals in the field of accounting. Notably, in the UK there are various organizations such as BP Amoco, Shell, Body Shop and Co-operative Bank among others which have implemented social accounting techniques into practices to improve the accountability standard in their accounting representations and develop transparency within their financial operations. Apart from ISEA, Social Audit Network (SAN) was also established in the UK which operates as a non-profit organisation facilitating the exchange of financial information between the company and the society (Social Audit Network, 2011; Cameron & et. al., 2010). Evaluation The conceptual framework of social accounting, as against the notion of creative accounting and traditional accounting representations, specifies a particular approach for the professional when preparing financial reports. The objectives of this framework are fundamentally associated with the enhancement of the quality standards in financial statements by providing information which shall be reliable and useful for the investors and other stakeholders creating significant influences on the overall organisational operations. However, deciphering a contradictory viewpoint, it has been observed by majority of the accountants that terms used in this accounting framework such as ‘faithful representations’, ‘fair-value accounting measures’ and ‘relevance’ are not quite realistic in nature which further hinders the development of accurate financial statements. Contextually, it has been argued by professionals that with the utilization of these concepts, accountants can develop real as well as updated financial statements which can further enhance the scope of accounting representations making it more democratised in nature. Conversely, it has been observed that accounting representations principally deal with historical data information where the concepts of this framework, acting as a performance assessment tool, limit its applicability in terms of social responsiveness and completeness. This also tends to limit the flexibility of the accounting representation to adapt to the changes proposed through social accounting techniques. It is worth mentioning in this regard that the framework has been rigorously debated and criticised where majority of the accountants deciphered their belief that valuation of accounting representations are not adequately practical (Shaffer, 2012; Duska & et. al., 2011). In this similar context it has been observed that facts which are recorded in financial statements often tend to be highly influenced by the decisions, knowledge and the interests of the accountants. In traditional accounting practices, there have been multiple instances where the professional judgement of accountants depicted inappropriate calculation of fair-value of the business along with budgeting misrepresentations hampering reliable judgements (Arthur & et. al., 2006). Contextually, majority of the accountants argued that by following the social accounting framework it shall become quite beneficial for the professionals to record the accurate value of the assets and the liabilities owned by the company with due consideration to the uncertainties prevailing within the economic and social contexts and therefore render appropriate judgements (Price Waterhouse Coopers, 2013; Bowers, 2011). Conclusion With reference to the above discussion, it can be stated that accounting plays an imperative role through which organisations’ stakeholders and decision makers tend to obtain suitable information in order to operate its business functions successfully. It is worth mentioning in this context that during the recent financial crisis, various accounting professionals alleged the conception and the procedural vagueness in calculating fair values by banking sector companies as one of the basic reasons for the downturn. In this regard, it was argued that the calculation procedures of fair-value accounting system in primarily based on theoretical assumptions (IFRS Foundation, 2013). Furthermore, in the recent phenomenon, repeated cases were identified where companies have been misinterpreting their accounting statements in order to obtain unethical benefits either in terms of attracting investors or in terms of the director’s personal interests. 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