The Role of Accounting Information in Decision-Making Processes - Essay Example

Finance and Accounting Table of Contents Literature Review 3 Accounting information and decision making 4 Conclusion 8 Reference List 9 Literature Review Accounting has occupied an important position in modern organisations and society. The function of organisation depends on accounting practices and helps managers to take decisions regarding any financial or operational issue. So, decision making is related to accounting information that is acquired by the managers. The activities such as, assessment of cost and benefit of an organisation, setting financial norms and standards and reporting the financial performance, are needed for proper operation of an organisation. Accounting has emerged from management practices undertaken by traders and developing corporations. Presently, it has become the most influential component in managing social management and organization. In modern public or private organizations, developments in accounting are seen to have association with financial resources management. It is found to be associated with the goal of an organization as well as with different forms of management structure and segments. The managers and their preferences are highly dependent on accounting information since this provides a broad view regarding financial strength and weakness of an organization. The liquidity of an organization can also be judged through its accounting information since this offers adequate information regarding assets and liabilities in business. It is observed that in a broader society, importance of accounting has increased over the years as it has been applied at different levels of dynamic organizational areas. Accounting information is used in deriving and implementing policies for controlling price and wage and also for economic stabilization (Hopwood, 1983). This information is required for regulation of commercial and industrial sectors; and planning for national resources at times of peace and war as well as times of depression and prosperity of economy. Hence, accounting information seeks better social and economic efficiency (March, 1987). A state has always been an agent for both developments in commercial enterprise and accounting systems in industries. It has also encouraged in introducing newer sectors. The extension of accounting domain has developed better accounting thoughts and practices. It has been observed by theorists of management control that accounting cannot be regarded as a collection of practices for assessing economic magnitudes at individual levels; rather, it incorporates all practices that are undertaken by organisations. Apart from accounting procedures, cost and economic surpluses are very important for organisations. With growth of modern organisations, new practices have been embraced that have enabled centralised and co-ordinated control of functional divisions (Burchell, et al., 1980; Feltham and Ohlson, 1995). The increase in demand for financial information is also observed in capital market, agencies of organisations and state and in accounting profession. This has led to more rigorous and extensive approaches for preparing financial reports and disclosures. The accounting problems have become interdependent and precise; so, not only is clarity of new practices required, but implicit practices also need to be understood properly (Hopwood, 1983). Accounting information and decision making The accounting system is viewed as a “part of decision support system for managers, financial analysts, stockholders, or others with a stake in the organization” (March, 1987). The foundation of accounting system is from statistical decision theory, micro economics and n-person game theory. The accounting information connects to decision making, which helps the manager in reaching a right destination. The major ambiguity in decision making process is witnessed when future consequences of certain actions are overlooked. The decision making is hampered when knowledge of others are ignored, which is associated with the probable problems. The main rationale behind accounting information is to reduce uncertainty to be encountered in future. The uncertain consequences are very important for an organization since these may affect the day-to-day functioning. The events encountered by organizations are “representatives to the universe” (Banner, 1999); and thus, it is not trivial for them to ignore those events. Hence, such events are observed consistently and accurately. The uncertainties are analyzed through implementation of models, which results in several estimations and inferences. These estimations help managers to select apt policies for maintaining an uninterrupted business (Stevenson, Busemeyer and Naylor, 1990). The contemporary theories related to decision making do not highlight the biases in estimation processes. These emphasise upon two complications related to usage of information that facilitate effective decision making in organizations, which have limited conflict of interest and rationality. The main aim behind limited rationality is that every aspect is not within knowledge of every single individual. The decision is taken on partial information and selections and thus latter the outcomes are encountered. Certain cost is applicable for organizing, gathering and retrieving information. The cost of information is explained by associated benefits. However, the anticipated benefits of the information are determined in single-period decision theory. The expected benefits of information can be calculated as the expected value of a situation where information is accessible minus that of the situation where information is unavailable. The formulation of information generates accurate calculation in a well-defined manner. This also describes limitations of information (Simon, 1959). The main idea related to conflict of interest is that organizations form coalition of groups and individuals for pursuing different goals. It is observed that limited rationality and viewpoint of conflict of interest may furnish an unfinished presentation of challenges encountered by decision making process. It can, thus, harm information engineering. The problems can be studied based on three observations: 1) Quite often, it is observed that preferences of owners and managers are not clear as it is assumed to be in theories of rational choices. The preferences are incompatible and are developed over time with change in experiences and decision process. The biasness concept is protected by axioms of contemporary theories on the basis of two guesses: first and second guess. The former indicates to effects that will be encountered later in future, which is the result of few actions (Vroom and Jago, 1974). The second guess refers to vague future preferences that decision makers will make in order to balance consequences when realized. Hence, it can be inferred that preferences of managers are often harmful to organisations, when they merely make second guess. 2) The decision making process of organisation has less consistency with respect to attributes of decision theory. Organizations are viewed as coupled systems, which are loosely held by the management. So, the connection between solutions and problems is ambiguous. People, solutions, challenges and choices for opportunities are combined in such a confusing manner that it is difficult to predict the primary outcomes as well as the initial agenda. There are studies that have described the use of information in devising policies, which suggested a disconnection between decision and information strategies. The generation of information as well as associated challenges and their solutions are formulated by professionals. The solutions are not about anticipating any decision; rather, this involves strategies and requires appropriate decision making (Simon, 1979). 3) The modern theories explaining interactive competition and decision making advocates the “theories of calculated cleverness in the interest of self” (Cooper and Rhodes, 1978). Decision Uncertainty The level of uncertainty encountered by entrepreneurs while making decisions is quite higher than that encountered by managers of large organizations. The entrepreneurs and managers experience dissimilar advantages of accounting information. The managers of large organizations find it easy to gain access to accounting policies since these are deeply embedded in their culture (Schwenk, 1988). Even so, it is difficult for entrepreneurs to get started with accounting policies from the scratch as this may lead to misrepresentation of the accounting information. The managers usually have access to past performance and historical trends of the organization, which assist them to reduce the level of uncertainty while taking any decision. These also help in reducing the cost of organizations since level of uncertainty are reduced. Then again, entrepreneurs do not have the details of past performance as they are initiating a new business. So, they fail to take decisions that will reduce the level of uncertainty in their business and in turn reduce cost (Hambrick and Crozier 1985). The managers have the power to make close approximate rational decisions, which are ideal for any situation. However, entrepreneurs do not enjoy this opportunity, owing to the fact that concept of rational thinking comes with experience. The plan for starting the venture is based on fresh services or products does not require much information from past since it is a new business. Additionally, acceptance of new products or services in market relies upon a number of uncertainties or challenges. The efforts made by entrepreneurs to reduce the level of uncertainty are generally expensive and are not usually effective compared to that of the managers. In such a case, decision regarding the venture is required by the entrepreneurs in order to avoid risks. Heuristics and biases have facilitated the perceived sense of overall consideration. Thus, the rules of game are understood. It is observed who are more vulnerable in using heuristics and biases in decision making become an entrepreneur. Conservative decision makers of larger organizations incline to use more of methodical information that is easily available. The entrepreneurial activities become irresistible when one tries to generalize the situation by employing heuristics and biases (Busenitz and Barney, 1997). Complexity in decision making Established organisations develop stringent policies and methods for assisting managers in taking decisions regarding issues arising in work environment. Nelson and Winter (1982) regards this decision making practices as routine jobs. These emphasise on ability of mangers to transform a complex decision into a simple one. Apart from the routines, organizations develop organizational charts, which define areas that demand decision making. The organizational charts enhance the impact of reducing complexity in decision making framework that is encountered by the firm. This enables managers to not depend on heuristics and biases. The entrepreneurs do not adopt any decision making policies and methods as done by the large organisations (Hambrick and Crozier, 1985). In such a framework, simplified heuristics and biases will help the entrepreneurs to a great extent in utilising new opportunities for making decisions (Tversky and Kahneman 1974). The entrepreneurs are, however, quite opportunistic and act with limited information (Stevenson, Busemeyer and Naylor, 1990). They convince a number of stakeholders regarding their creditability in business. They do not use base rate probabilities for justifying their ventures. Judgement and decision making (JDM) Judgement and decision making (JDM) is important in organizations for tracking issues in accounting. The managers and financial analysts employ this method to project any judgment regarding issues arising in financial statements. The JDM helps in detecting any material misstatement in the statements. The judges responsible for examining work of the auditors evaluate whether or not auditors have followed the professional standards for portraying any audit opinion. The standard setters, who govern the work of auditors and accountants, examine whether the latter have presented the financial information in a correct format. Yet, there can be errors in decisions and judgement. This issue has been discussed by several academic researchers for identifying the main cause of discrepancy. They have discovered that judges are often paid poorly. The theoretical reason for examining JDM in accounting is that theories of account setting possess unique characteristics, which clarify the primary disciplines. Conclusion Accounting has acquired a position of significance in operation of every organisation. It has not only enhanced the decision making power of managers, but have also provided a number of choices that ensure perfect decision making. Therefore, it can be concluded that accounting has become a culture for every organisation. The judgment and decision making is useful for the judges in order to recognize issues in work of auditors or accountants, thereby forming a stringent and transparent system. Reference List Banner, S., 1999. Judgment and decision-making research in accounting. American Accounting Association, 13 (4), pp. 385-398. Burchell, S., Clubb, C., Hopwood, A. and Hughes, J., 1980. The roles of accounting in organisations and society. Accounting, Organizations and Society, 5(1), pp. 5-27. Busenitz, L. and Barney, J., 1997. Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making. Journal of Business Venturing, 12, pp. 9-30. Cooper, W. and Rhodes, E., 1978. Measuring the efficiency of decision making. European Journal of Operational Research, pp. 429-444. Feltham, G. And Ohlson, J., 1995. Valuation and clean surplus accounting for operating and financial activities. Contemporary Accounting Research, 11 (2), pp. 689-731. Hambrick, D. and Crozier, L., 1985. Stumblers and stars in the management of rapid growth. Journal of Business Venturing, 1(1), pp. 31-45. Hopwood, A., 1983. On trying to study accounting in the contexts in which it operates. Accounting, Organizations and Society, 8(2/3), pp. 287-305. March, J., 1987. Ambiguity and accounting: The elusive link between information and decision making. Accounting Organization and Society, 12(2), pp. 153-168. Nelson, R. and Winter, S.G., 1982. An evolutionary theory of economic change. Cambridge: Harvard University Press. Schwenk, E. R., 1988. The cognitive perspective on strategic decision-making. Journal of Management Studies, 25(1), pp. 41-55. Simon, H., 1959. Theories of decision-making in economics and behavioural science. American Economic Association, 49(3), pp. 253-283. Simon, H., 1979. 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